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How has the Covid19 pandemic impacted credit assessments for mid-sized businesses?

18th Jan 2021   ·   The ThinCats Team   ·   Insights

The economic impact of the pandemic has affected mid-sized businesses in many different ways. Greg Beamish, Head of Credit at ThinCats explains how his team responded to the pandemic and continued to provide funding support in such a fast changing and uncertain trading environment.

What was your initial response to the first lockdown in March?

After quickly moving to remote working, our main priority was to proactively contact all existing borrowers to understand the immediate impact of the lockdown on their business and assess their resilience to further lockdowns or restrictions on trading. In line with ThinCats’ personal and local client servicing model, our regional credit and business development teams worked together to engage with existing borrowers. Developing a realistic cash flow model was a key part of the process and needed to take into account our borrowers’ eligibility for government support schemes including the Job Retention Scheme, cash grants, business rates holidays, tax payment deferrals etc.

Following the first wave of contacting and understanding the circumstances and financial position of all borrowers, we introduced interest and capital repayment holidays, revised or suspended covenants and ensured, where required, that new capital requests were in progress. Our initial findings were that some businesses in the hospitality, travel and leisure sectors had obvious challenges to their immediate revenue flows but, overall, the vast majority of our borrowers were well capitalised with decent liquidity cushions in place to enable them to weather the imposed lockdowns.

Borrowers were typically proactive in their approaches to us and were seeking to understand what was permissible under the various government schemes. Therefore, our teams acted not only as financiers but also quasi corporate finance advisers.

A point that persistently worked in favour of both borrowers and ThinCats was the minimum liquidity covenant which is a standard requirement for our lends. The existence of this test ensured appropriate focus from management teams on liquidity runway and acted as a diagnostic tool to allow a proactive response by Thincats to address any potential cash flow needs

How important

was being able

to provide CBILS

funding?

As soon as the government announced details of the Coronavirus Business Interruption Loan Scheme (CBILS) we recognised the genuine benefits to businesses of being able to access funding on attractive terms including no interest payments for the first 12 months.

Following amends to the original CBILS rules in early April, which widened the scheme to many more businesses, we worked closely with the British Business Bank (BBB) to become one of the first alternative lenders to be accredited for CBILS. Our accreditation was announced by the BBB at the end of April meaning we were able to fund our first CBILS loan in June.

Due to our earlier work engaging with existing borrowers, we were delighted to be able to open up CBILS funding to new borrowers from mid-July.

A key aspect for us was seeking clarification from the BBB on exactly which type of deals were eligible so that we could support as many businesses as possible. For example, there was initially some confusion around the eligibility of funding for growth purposes such as acquisitions, or the rules around funding private equity backed businesses, which we were able to clarify.

Did you change your credit process as a result of the covid pandemic?

In broad terms no.

For example, we continued to use the framework of the regional business development and credit teams engaging with the adviser and borrower very early in the funding process complemented by data from our proprietary credit model, PRISM. This resulted in a Deal Forum led by the regional head of credit, after which initial terms would be issued. If accepted, more detailed underwriting and approval by the Investment Committee followed prior to final terms being issued.

We believe this early and easy access to credit decision makers is a key difference between us and the banks. In respect to CBILS it proved critical in enabling us to thoroughly understand the impact of the covid pandemic on a particular business, and to create a funding structure to best suit its immediate as well as longer-term needs.

As part of our underwriting process we also had to assess if there had been any fundamental structural changes resulting from Covid that could impact a business’s future prospects. For example, it’s likely that working from home for at least a few days a week will become much more common post pandemic, so businesses heavily reliant on trade from commuters or city centre office workers may be facing long-term impacts.

On the other hand, we would expect cinemas to be more resilient as it is not yet possible for the vast majority of the population to create the full “cinema experience” at home.

Our aim throughout has been to structure CBILS deals in a sensible way to provide sufficient liquidity to take account of any further potential restrictions whilst not overburdening businesses when they have to start making payments once the initial 12 month non-payment period is over.

Were there any surprises in the types of proposals that you have been assessing?

Initial conversations with existing borrowers were much as expected focusing on their need for additional working capital to maintain liquidity levels. However, when we opened CBILS to new borrowers we saw a significant increase in proposals for growth funding including for acquisitions.

Calling on our expertise in this area and following conversations with the local business development and credit teams we were able to quickly inform advisers and borrowers whether we would be able to support the proposal or not, which provided valuable certainty to all parties. There’s no doubt that CBILS accreditation has played an important role in bringing alternative lenders such as ThinCats into the mainstream.

We look forward to seeing whether the successor to CBILS will help deliver the ongoing funding required by UK businesses as the positive momentum from the rollout of covid vaccination programmes and the gradual lifting of restrictions create an environment for strong economic growth.

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