If you want to lock in valuable support from your organisation’s banks following the impacts of COVID-19, now is your once in a generation opportunity to do it.
Any organisation with debts of less than $10 million, and who received some form of relief resulting from COVID-19, is likely to receive much better support from their banks, but only until 31 March 2021.
The Government, through the Australian Prudential Regulation Authority (APRA), has acknowledged there are many good organisations out there in an unusual position. Those that were once profitable are now struggling to meet their loan repayments simply because of the disruption to their normal operations - think travel agents, airlines, hotels, restaurants and indoor venues. They need ongoing support, but the banks cannot prove normal loan affordability.
As a result, APRA has advised the banks that the revised loan arrangements they put in place with their COVID-19 impacted borrowers do not need to meet the usual serviceability requirements and banks do not need to identify these as problem loans.
This gives banks far more scope to assist now. As a result, ongoing support in some form should be much more likely. Support could include:
- A much longer loan term to reduce repayment requirements
- A longer term for interest only payments
- A bigger balloon at the end of your term.
Here’s a closer look at the two eligibility criteria to help you determine if your organisation could reap the benefits before the end of March.
Debts of less than $10 million
Banks calculate debts on the overall consolidated group level. If an organisation has multiple subsidiaries who have all borrowed from the same bank, their debts will all aggregate for the purposes of determining if they’re within the cap.
This $10 million cap is also calculated separately by each bank, so if you have multiple facilities across a number of banks, the aggregate of the facilities, for each bank, is the relevant calculation.
Some form of COVID-19 payment relief
This benefit will only apply to bank facilities if there was some form of COVID-19 relief already provided. This is not defined, but in its simplest form it will be any facility where the principal and/or interest payments were relaxed or deferred. It is unlikely to include loans solely where covenants or reporting obligations were eased or done away with, or where pricing was amended.
What you should do
If you are yet to formalise a new arrangement with your organisation’s bank in relation to the payment relief received, you should consider engaging with your bank now.
In many cases, banks merely waived or relaxed payments for a period of months and these will eventually recommence. If your payments are set to recommence, you should seek clarification regarding the missed payments. Specifically:
- Were the missed payments simply deferred and the bank wants them caught up immediately?
- Were the missed payment requirements removed altogether and your loan carries on now with payments re-commencing at the old level?
- Are repayments now being recalculated, so future payments will be higher, to spread the missed repayments out over the remaining term of the loan?
- Will the loan term be extended, with additional payments required at the end to finally repay the loan?
- Will you have a larger balloon payment at expiry of your facility to take account of the higher principal balance?
How does this help
Normally, when a bank revises loan terms or conditions for an existing client, it must ensure the client can afford the new arrangements. Typically, they do this by checking the repayments against the most recent financial statements. Unfortunately, many recent financial statements are showing poorer than usual profitability because of the impact of the COVID-19 pandemic.
If a bank client can’t afford an existing loan as a result of financial distress, the bank cannot prove affordability by simply providing a honeymoon interest rate or allowing them to skip payments. This would circumvent the rules designed to ensure banks identify problem loans.
APRA’s actions means banks can approve support measures to their COVID-19 impacted borrowers without needing to report a problem loan, even if the 2020 financial year accounts do not show the usual profitability.
Get in quick
As with all good things, they can’t last forever. Banks only have until 31 March 2021 to document these new arrangements with their clients. Any new arrangements documented from April 2021 onwards will be subject to all of the normal serviceability/security requirements. Any client in financial distress at that time is likely to have their loan flagged as a problem loan.
Banks are likely to move clients with problem loans into the ‘bad bank’ and look for ways to get their money back.
If your organisation received relief as a result of COVID-19 and you are yet to discuss arrangements with your bank, now is the time to take action.
If you need assistance with finalising new arrangements with your bank prior to 31 March 2021, BDO’s Debt Advisory team can help