What Lenders Expect from Borrowers Battered by COVID-19 Fallout
The COVID-19 pandemic has created a seismic shock to the economy, slowing and in many cases stopping the gears of commerce. The resulting drop in demand for products and services has been dramatic, with U.S. GDP contracting 33% in the second quarter of 2020. This, in turn, has given rise to an extreme cash crunch for corporate borrowers that is impairing their ability to service their debt. As a result, commercial Chapter 11 filings rose by 52% in July versus July 2019, with the initial wave impacting larger, public companies within the most vulnerable industries, such as retail, oil and gas, travel, hospitality, and entertainment.
The distress has likewise impacted mid-size and small businesses. However, lenders to these companies have so far been relatively restrained in addressing their borrowers’ issues due to:
- Government assistance in the form of the CARES Act, including Payroll Protection Program (PPP) loans; increased unemployment benefits; and other programs that have provided emergency liquidity to companies and maintained some consumer demand.
- Temporary relaxation by bank regulators of loan classification rules, allowing lenders to work more easily with borrowers to extend or modify their loans, defer payments, and waive fees. These actions would normally force lenders to classify the loans as troubled and force them to use capital to reserve against them.
