Worryingly, this is similar to what we’re seeing in the banking industry…
Banks speak their own language. So a number of well-intended changes (predominantly from the Carnell review) have been brought into the commercial banking environment to ensure borrowers are able to better understand the obligations they are entering into. This was initially the case in the <$3m lending segment, but it is now impacting lending up to $5m.
Removal of covenants was one area thought to simplify things for borrowers. Covenants, when set properly, serve a valid purpose and usually highlight issues that both a borrower AND lender would be concerned about. However, when set poorly and without discussion, covenants are seen as pests – like the cane beetle.
In removing the covenants, banks have now introduced annual or half-yearly reviews of facilities with a clause that may look something like:
Without prejudice, and in addition, to the General Conditions Schedule, continuation of the Facilities is subject to the Lender’s satisfactory half-yearly and annual review of “The Group” financial position.
So in removing the beetle (covenants), banks have now introduced the mighty cane toad (reviews).
Now more than ever it is critical that borrowers manage their banking relationship proactively, given the inherent increase in risk as an unintended consequence of catering to the lowest common denominator. The review process is not the same across the banks – some conduct responsible reviews yet others are down-right onerous. And this is where borrowers can control the risk, through understanding the review process, negotiating reasonable terms (or moving to more reasonable financiers), and getting on the front foot with each review.
Remember, banking should be a partnership between a borrower and a lender who are 100% correlated in their future success – when a borrower does well, a bank does well and vice versa. Partnerships need to be fair though, without unintended consequences of added risk…you don’t need to allow toads in your backyard.
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