An imaginative template for dealing with the cash crunch

TAKE YOURSELF back, if you can manage it, to a more tranquil time—January, say. Imagine a smallish restaurant chain that had a bad Christmas. Its owner borrowed heavily to expand only to find its new outlets were slow to attract customers. The chain cannot meet its interest and other costs. A consultancy says $10m is needed to tide the firm over until its problems are fixed. The bank says it will forgo interest payments worth $5m, if the owner kicks in $5m of equity capital. A deal is struck.

Fast-forward a few weeks and imagine a similar chain that is temporarily shut down because of the covid-19 virus. The firm has no revenue, but it still has fixed costs. The hypothetical January deal is a template for dealing with the problem. But in a broader crisis, things are always trickier. The bank’s balance-sheet is stretched to the limit. The stockmarket crash has taken a bite from the owner’s wealth. And she is reluctant to sell a stake in the business.

An alternative is to turn to specialist private-credit funds. These are vehicles backed by long-term investors, such as insurance firms, sovereign-wealth funds and university endowments, which lend directly to companies, much as a bank would. Some will have discrete distressed-lending or “special-situation” arms. Many more are prepared to put up capital when others won’t....



via The Economist: Finance and economics Business Feeds

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