Did you know companies today are defaulting at more than twice the rate of 2015? In fact, there were more corporate defaults in the first nine months of 2016 (150 total), than there were in all of 2015. (Standard & Poors)
Global corporate defaults reached 104 in 2016 – the fastest pace of defaults since the financial crisis in 2009. While those days are seemingly over, the trend says otherwise as the S&P expects the U.S. corporate trailing-12-month speculative-grade default rate to rise to 5.1 percent by September 2017. (CNBC)
So what can an organization do to keep its debt compliance in order to avoid default? Immediately, there are several things a firm can do to mitigate its default risk. While these tactics are fairly easy in concept, they’re rather tedious and difficult to execute. Here are five things that absolutely have to be done to avoid default:
- Understand the entire lender agreement – not just parts of it, all of it. Understand every part of every credit agreement you have, otherwise, a default is imminent.
- Identify the Obligations and make a checklist. First, answer basic questions. Next, create a checklist for all covenants, no matter how insignificant they may seem to you, because what’s insignificant to you, may not be insignificant to the lenders.
- Analyze the Obligations and make sure you’re in compliance. Decide who in the organization has the knowledge and can impact compliance. By doing that, you’re going to actually go out and talk to many people throughout your organization who are right on the firing line. Now you get all those responses in, and you get everybody’s answer, and
- Determine whether any of the issues that are raised are significant or material to determine your approach with your lenders, possibly the board, or any other member of management.
- Perform a full vote analysis. Ensure your team understands all nuances of any issues, how they relate to the covenants, and finalize the reporting responsibilities.
Taking these five steps will allow your organization to take a proactive approach with the lender on how to best to deal with any issues. As a result, your organization is less likely to get caught in the draconian process of calling a default.