What to do if the covenants become tight or are even broken?

March 03rd, 2020

With declining turnovers, the risk of breaking agreed credit ratios increases. The banks are alerted and affected companies should be well prepared before entering discussions with its lenders.

In Germany new orders have been declining for months and different sectors, besides industry, are affected. Business plans often become obsolete and credit agreements cannot always be fulfilled to. The reasons for this can be diverse and either of short- or medium-term nature or even point to a more fundamental crisis.

Nevertheless Banks and lenders have experienced this less often in the recent past and are therefore sometimes are less used to such processes. On top, the responsibilities within the banks change regularly and the trusted long-term counterparts may change. The recent shifts in the respective bank departments are not of help either. Management must under any circumstances avoid a crisis of confidence on the lender’s side resulting from delays or unprofessional information. A crisis of confidence will bring lenders to feel pushed to take the initiative, thus restricting the management’s possibilities to act in any way.

Herter & Co. has decades of experience in comparable situations and can predict the requirements, and reactions of the banks. In the short remaining time for a company to take action, we usually carry out the following steps, while the banks ought to be extensively informed at an early stage:


  • Analysis of the situation:
    What is due, since how long, how is the liquidity situation, what does the credit agreements foresee in such situations?


  • Analysis and preparation for an adjustment of the respective plan:
    Providing detailed information to the lender concerning the reasons of the underperformance.


  • Analysis of the recent bank communication and status of it:
    Information requirements during a crisis are different and more detailed; nevertheless, it’s important to remain consistent with the data provided prior to the crisis.


  • Preparation of a new business plan:
    A quick-fit solution worsens the negotiations in a possible second round considerably. Only a realistic new business plan re-establishes the basis for a stable mid-to long-term solution.


  • Analysis of the lender’s and other stakeholder’s position:
    Depending on the structural position, contracts and loan collateral, the position of the company and its shareholders must be evaluated differently in different crisises. Herter & Co. carries out a realistic assessment and thus creates the basis for a viable process strategy.


  • Preparation of the bank approach:
    Informing individual banks in advance? How? What does this potentially trigger (with banks/credit insurers/customers/employees)? With which documents do we approach the lenders? Bank meeting YES/NO? These are just a few issues that need to be evaluated and decided on in every single case.


  • Preparation of a proposals for the banks:
    What is the appropriate credit request and best solution in terms of meeting the different interests of stakeholders? How do we further report to the banks? What are the next steps? Only if the banks are convinced that the company management is in control of the situation, a trustful relationship is established, thus enabling the company to take own decisions without external consultants or new managers (“recommended” by the banks).


  • Organizing and assisting bank meetings:
    Herter & Co. helps guiding communication, conducting informal discussions and hosts the process. One aim here is often to keep the company’s managers “out of focus”, as guilty parties are always looked for.


  • Negotiation of a new agreement:
    If there are no alternatives to the existing financing, the company and its shareholders are not best positioned, which leaves less possibilities for negotiations. Our experience shows, however, that a well-prepared process can enhance a new agreement than one without good preparation. Herter & Co. has already assisted in numerous cases and can benchmark requests in order to achieve the best possible result along with you.


If you have any questions, please do not hesitate to contact us. We look forward hearing from you and assure a confidential handling of any request.
Marcel Herter, Tel. 069 770 1991 0 or