What is
COMPANY DEBT REFINANCING (SPECIAL SITUATIONS)?

Company Debt Refinancing in Special Situations: Everything you Need to Know (Updated 2021)

What is bank refinancing?

Bank refinancing simply refers to the process a Company enters to rollover or extend its current financing arrangements with its lender, usually a bank. Most Companies have finance facilities in place that don’t envisage that at the end of the term of the facility there will be a nil balance. Rather, it is expected that at the end of the term of the banking facility there will still be an amount owing, that can even be larger than when the facility began. The Company and the lender expect that prior to the end of the term, there will be discussions and a new lending facility will be agreed that replaces the old one.

What does “Special Situations” mean?

Special Situations is a term used that is essentially a nice way of saying that there is some sort of issue or problem, or extra degree of difficulty faced by a Company. It could be that the Company is under financial stress, has made losses, is struggling to meet current facility covenants or is unable to meet a repayment term of an existing bank facility. It can often mean that the Company and the lender are facing a material loss. There are many other terms used that have similar meanings such as Distressed Debt, Workout, Special Assets, Hardship and Opportunistic Credit Situations.

What is a Special Situation bank refinancing?

A Special Situation bank refinancing is where a Company has a rollover or repayment date looming, or perhaps the Company is in breach of some covenants in its lending agreements that has meant that all debt is now due and payable to the lender. In such a situation, the Company will need to seek special terms and considerations and will need to agree that with its existing lender of obtain an agreement from a new lender to “take-out” the old lender on agreed terms.

Why consider a Special Situation Company bank refinancing?

A Company will usually enter the process of a Special Situation Company debt refinancing because it has no choice! All Companies would intend, at the start of a lending agreement, to meet the terms of the agreement and pay the lender in full. But sometimes unexpected events happen, and the Company can’t meet its obligations. In that situation, the Company is in a “Special Situation”.

What and who are Special Situation lenders?

There are lenders that specifically aim to provide lending in Special Situations. Often, they are Private Equity Funds or divisions within large banks. They don’t enter these situations with a plan to lose money or simply bail-out distressed companies – they make money by obtaining special deals which will often involve fees, higher interest rates or equity positions so that the lender can share in any upside from a recovery.

Tell-tale signs you need a Special Situation bank refinancing

Often a director is unaware that their Company has entered the realm of a Special Situation. That is often because the current lender has been too subtle, or has deliberately hidden, why there is a reluctance to roll-over an existing lending facility. In other situations, the director is fully aware that the Company will be unable to meet its financial obligations and it is the Company that informs the lender. If you, as a director, are wondering whether your Company has entered the realm of Special Situation then you can look for some, or all, of the following flags.

Have you been referred to the financial hardship section at your bank?

All banks are required by law to have a financial hardships section to assist clients who are facing financial difficulty. That area is supposed to help the debtor navigate through the bank and obtain concessions, if necessary, to help them meet their obligations.

Has your bank told you the investigating accountant is coming?

If the relationship officer at the bank has informed you that an Investigating Accountant is coming to see you, then it is almost certain that your loan is now with the Special Assets division at the bank. When the bank is concerned about being paid in full, hey will often move the account to the Special Situations division, where the relationship managers have different skills and backgrounds specifically designed to recover the banks loans.

Has your bank told you they won’t roll your facility?

Normally a bank will want to retain a loan facility with a client – that is the business banks are in. So, if a bank has informed you that they will not roll-over a loan then they are saying to you that they would like you to obtain funding elsewhere any for you to longer be a client.

Has your bank told you that you must refinance within 3 months?

In addition to the above, if the bank has said they would like you to obtain financing elsewhere and they have specifically said they would like you to do so “within three months” then it is a red flag for you. The Banking Code of Conduct requires a lender to give three months’ notice in these situations so if your bank has used that terminology, then you are probably already in a Special Situation.

Has your business loan broker told you they can’t get you refinancing?

If you have approached a business loan broker and they have advised that they are unable to obtain refinancing, you may be about to enter the realm of Special Situations.

How do I know if I am already in the Special Situation area of my bank?

Often, and preferable, the bank will simply tell a director that they have been referred to the Special Situations area of the bank. Sometimes the bank is too subtle in informing clients. However, different banks have different names for what we are calling Special Situations. Here is a grab-bag of names used by banks for their Special Situation areas:

• Strategic Business Services (“SBS”)
• Distressed Debt
• Distressed Debt Workout
• Workout
• Special Assets Division
• Bad Bank
• Financial Hardship
• Opportunistic Credit

What’s the process for “Special Situation” debt refinancing?

There is no specific process that always applies in a Special Situations debt refinancing. The process will often be driven by the specific situation faced by the debtor and lender. Sometimes speed is essential and at other times, patience and extensions are better. The usual process, when led by someone such as RestructuringWorks, is designed to be timely and orderly, and will often be as outlined below.

Assessing if you are in a Special Situation

An advisor on behalf of the Company, such as RestructuringWorks, will make an initial assessment to determine whether a debt refinancing is likely to be achievable.

Assessing your Company’s financial position

If a Special Situation debt refinancing seems possible then the Advisor will work with the Company to assess it’s current financial position including a determination of immediate cashflow needs, probably informing the lender and possibly taking short-term measures to stabilise the situation.

Preparing financial information

When short-term issues are addressed, then the Advisor will work with the Company to prepare business plans, historical financial data, and forecasts to determine the Companies asset position and ability to pay its debts.

Finding a Special Situations lender

Often, the Advisor will approach various Special Situation Lenders to see if they are willing to take a position and if so, to determine what sort of arrangement can be agreed.

Negotiating with your current lender

After the Advisor has prepared the above groundwork, then discussions with the current lender and prospective lender can progress and become more meaningful and detailed.

Why can’t my usual Business Loan Broker deal with a Special Situations loan?

Company Loan Brokers have systems in place and a panel of lenders that efficiently allow for refinancings in standard situations. So, Brokers are excellent at finding you the best financial deal, provided you are in a standard situation. Brokers are far less able to obtain refinancing in situations that are non-standard. Brokers are not equipped to deal with non-standard situations and will sometimes actively avoid those situations.

Is a Special Situation bank refinancing difficult?

Yes, a Special Situation bank refinancing is difficult, unless you’ve got the right experience. Most Companies, directors and lenders are excellent at dealing with standard finance situations. The area of Special Situations requires specific skills and experience. There are professionals, such as those at Restructurings Works, and staff with the relevant divisions at the banks and lenders, that specialise in the non-standard. For those professionals there are tried and true practices and processes that smooth the path.

Is a Special Situation bank refinancing more expensive?

A Special Situation bank refinancing requires specialised skills and a large time commitment from those involved. So, for the Company this may initially result in higher fees and a higher interest rate. But a Special Situation negotiation can also result in a material reduction in the amount due to the current lender. So it can be “expensive” in terms of immediate costs but it can also save a business and a material reduction in the debt burden can also be achieved.

If my bank won’t refinance my Company, then why would another bank or lender?

Banks will sometimes make policy decisions to exit particular market segments. Lenders will also sometimes decide that a particular client is unlikely to be profitable in the future and so exiting the position is the desired outcome. In those situations, another lender may well have decided that the particular market segment is desirable for them, or it may be that a new lender is aiming to not only lend to the debtor but seek an equity position to share in the upside of a recovery. So, the principle is that, even though a situation may be unsuitable for an existing lender, there are new lenders that may be seeking exactly the situation on hand.

Will my bank take a haircut on their loan?

Sometimes. If a loan has been referred to the Special Situations area of a bank, then the bank will be aware that it is a likely outcome that they will not recover their loan in full. Part of the role of an Advisor, such as Restructuring Works, is to make an assessment for the current lender of what they can expect to recover in a best case, best guess, and worst-case scenario. In some situations, a lender may be willing to accept a haircut, being a payout below the full amount due.

What if the bank doesn’t yet know my Company is under financial stress?

It will often be the case that the Company is aware f its inability to pay a lender in full before the bank comes to that conclusion. In such a situation it is usually best to seek the advice of an Advisor, such as Restructuring Works, so that an assessment can be made of the best path forward. The Advisor will then recommend the best way to inform the existing lender and to do so with a specific strategy in mind.

Personalised advice

Every company’s circumstances are different. We strongly encourage anyone considering a company restructuring to give us a call to discuss your specific circumstances. We may even recommend a cheaper (or free!) solution.