It has been a turbulent 18 months in the banking and finance sector.

We’ve raced to refinance our clients’ loans to beat interest rate hikes – but we’ve also seen clients walk away from deals as a result of the loans becoming too expensive, plans for acquisition, expansion or purchase of assets no longer profitable or viable. Market conditions have been tough for some of our clients and have left some forced to take on additional debt to meet spiralling costs due to inflation. 

As you are probably aware, loan agreements typically contain ‘financial covenants’. These are calculations that measure either the financial performance of the borrower or the value of assets, and the lender and borrower agree thresholds that must not be breached. When market conditions change (such as a rise in interest rates, a dip in property value or an impact on profits), those thresholds can suddenly and unexpectedly be in breach. This gives the lender the ability to ‘accelerate’ the loan – which means the whole of the loan is immediately due and repayable.

Fortunately, the majority of the lenders that our clients have dealt with following a breach of said covenants have been pragmatic and agreed to a ‘covenant reset’; where the breach of the threshold is forgiven, the lender does not demand the loan repayable and the parties agree new thresholds that are attainable. 

We’ve also seen an increase in requests for personal guarantees from directors and shareholders – it seems now that lenders are not willing to leave the liability for the loan at the door of the company and want more leverage in a scenario where a borrower is in default under the loan. Some say this is a tactic to ensure that directors and shareholders remain engaged with the lender if borrowers are not performing, but ultimately, if a director or shareholder gives a guarantee and is unable to pay it following a demand from a lender, the lender would be able to take steps to make that individual bankrupt. In a nutshell, proceed with caution. 

Some of our clients have delayed deals until after the result of the election, or for the optimistic, to see if the interest rate falls. It seems clear that we will not return to the low interest rates of the past decade. 

For those who want to act now, agreeing to lending at a higher interest rate but with low or no fees on repayment gives borrowers the option to refinance should interest rates drop in the coming years. 

Lending from non-banks has continued to increase and the expectation is that this trend will continue. The market remains liquid and there is lots of debt – it is just expensive. 

Top tips for our clients looking for funding arrangements this year: 

1. Bank lenders are undertaking extra due diligence due to the market conditions, which takes time. Give yourself plenty of time to find funding if you have any plans. Consider non-bank lenders if you need to go quickly (although this typically comes at a price). 
2. If you are asked to give a guarantee as a director or shareholder, try to agree a cap. A cap does not typically extend to legal costs the bank may incur in enforcing the guarantee against you, so bear that in mind when setting the threshold. 
3. As always, carefully consider the terms of the loan agreement and any security. Breach of the terms usually mean the lender has the power to ‘accelerate’ the loan which means the loan is immediately due and repayable; borrowers should be cautious to ensure the terms that they agree are not going to be easily breached.