Coronavirus and the Financial Institution: Strategic Considerations for Lenders

Key points to consider include:

Risk to Existing Credits.

Financial institutions must examine their existing portfolios and begin to assess potential credit risk. Senior management must consider how a borrower’s industry, clientele, and geographic location might impact the borrower’s business operations—and their ability to stay compliant with both financial covenants and repayment obligations. For instance, certain industries have already been hit particularly hard by the spread of the coronavirus, including tourism, travel, transportation, hospitality, and food and beverage. Borrowers with clientele in western Europe, or those who rely heavily on manufacturing operations in China or Southeast Asia may have additional risk going forward.

Interest Rates.

On March 3, 2020, the Federal Reserve announced an emergency interest rate cut of one-half a percentage point. Just two weeks later on March 15, 2020, and following further global economic developments arising from the continued spread of COVID-19, the Federal Reserve announced that it would lower the target range for the federal funds rate to between 0.00% and 0.25%. Because lower interest rates tend to create margin pressure, financial institutions must consider what impact these unprecedented rate cuts have on their current strategies.

Due Diligence for New Facilities.

While interest rate cuts often result in internal pressures, they can also increase demand for lending facilities—and the need for more wide-ranging due diligence considerations to minimize risk. Financial institutions must consider all facets of a potential borrower’s business operations, including how a disruption in the movement of people and goods may affect margins and a borrower’s ultimate ability to repay a facility as agreed. From the possibility of an extended supply chain disruption to evaluating whether a borrowing organization’s goods and services will still be in demand in the event of a far-reaching quarantine, lenders must prepare to substantially extend due diligence considerations.

Regulations.

In an uncertain economy, financial institutions must evaluate how new local and national restrictions and regulations will impact its ability to continue to provide service to its customers. Internal changes resulting from external factors may trigger a financial institution’s obligation to notify the relevant governing authorities.

Fraud.

Unfortunately, the declaration of a national emergency by federal governing authorities is often accompanied by an increase in scams and fraudulent schemes. Compliance teams must take special care to investigate potential fraud with new credits and continue to monitor ongoing relationships.

The COVID-19 virus has caused unprecedented uncertainty in global markets, and the situation continues to evolve. This uncertainty is likely to result in a period of significant pressure on business operations across all industries, which may result in substantial financial distress in both the commercial and consumer markets.

The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.

Author Corinne Brennan is a partner in the Bankruptcy & Restructuring Department at Klehr Harrison.