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HomeCOVID-19: Undertakings’ handling of financing and potential liquidity challenges due to COVID-19

COVID-19: Undertakings’ handling of financing and potential liquidity challenges due to COVID-19

16 March 2020

The Coronavirus has already had a large global effect on citizens and undertakings, and many Danish undertakings are currently experiencing the effects of the Coronavirus and the measures taken – in Denmark and on a global level – in order to handle the disease and reduce the risk of infection/spreading of the disease.

Bailout packages

In order to ward off the negative effects, the Government has introduced a number of bailout packages to help Danish undertakings.

The most important points of the bailout packages are that the largest undertakings are allowed to defer payment of VAT, just as the deadlines for paying PAYE tax and labour market contributions have been extended. The Government also wishes to include SMEs in this package, which is expected to improve liquidity for small and medium-sized enterprises. In addition, the Government proposes an extension of the time limit for the payment of B-tax, which in particular will benefit self-employed people.

In addition, the Government has introduced several new initiatives to help trade and industry. The Government contemplates, among other things, suspending the sickness benefit system’s so-called employer period in order for undertakings to obtain refunds from day one where employees are sent home or are put in quarantine due to the Coronavirus.

The Government has also introduced two new guarantee schemes aimed at Danish undertakings, just as the scheme on division of labour will become more flexible in order for undertakings to temporarily put employees on reduced hours allowing undertakings to quickly adapt to the situation and thus avoid dismissing employees.

For the same purpose, the Government has together with the unions and the employers’ organizations entered into a tripartite agreement on the refund of wages and salaries for private employers, which implies that undertakings initially have the option of receiving refund of wages and salaries of up to 90% of the employees’ wages and salaries.

In addition, the Minister for Industry, Business and Financial Affairs has decided to give banks wider options for granting loans. This takes place by releasing the so-called counter-cyclical capital buffer (broadly speaking money, which the banks are ordered to put aside for hard times), which gives the banks greater room to manoeuvring in order to withstand losses without having to impose restrictions on their lending.

Effects on the liquidity of undertakings

The bailout packages and the other government measures aim to give undertakings sufficient liquidity to pay their creditors, e.g. rent, suppliers and wages and salaries, and thus to ward off the undertakings’ immediate economic challenges due to the Coronavirus.

In a crisis such as this one, which hit us suddenly, and which hits undertakings directly on their revenues, it is first of all important that the management focuses on budget and liquidity management. It is important for the management to assess, whether changes can made that may contribute to ensuring liquidity and thus the operation in the short as well as in the long term. In this respect, it may be relevant to enter into a direct dialogue with the creditors and not least the bank, in order to find a solution; potentially for the deferment of payments or similar arrangements.

In relation to the bank, undertakings should review their bank and credit facilities in order to ensure that they do not risk breaching the conditions in the current situation, including any special conditions in respect of financial performance indicators (covenants) or otherwise breach their loan agreements.

Correspondingly, all other contracts should be reviewed, including in relation to any effects of failure to perform, if there is a risk that one or more contracts cannot be fulfilled. In such situations, the undertaking’s management should generally act proactively and initiate a dialogue/negotiations with the relevant contractual parties concerning alternative solutions models.

In addition, it should be uncovered whether the undertaking has the option of using the Government’s bailout packages and other measures and what it specifically means for the individual undertaking in order to use these options in the best possible manner.

If the economic challenges are clear and cannot immediately be rectified, a number of useful tools exist to ensure efficient and expedient handling of the situation and to ensure the survival of a financially distressed undertaking, which ultimately may lead to restructuring proceedings or other form of financial restructuring of the undertaking. In such situation, it is decisive that the management focuses on cash flow and ensures that one or more creditors are not treated unfairly and in a manner that is contrary to applicable rules.

Previous financial crises show that it is important to act quickly in a changing market where the preconditions and the framework can change in an instant. Furthermore, we know that targeted and intensive cooperation between all the undertaking’s stakeholders, including banks and financial institutions, public authorities, suppliers, unions and trade organizations, etc.

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