Worried about the negative impact of the revised Monetary Policy Rate (MPR) may have on the financial performance of most businesses, experts at PricewaterhouseCoopers (PwC) have advised against restructuring of loan facilities without understanding the conditions.
According to the experts, to ensure that future profitability of both corporate entities and banks are not compromised, the trend where loan facilities are restructured without a good understanding of the borrowers and their business drivers needs to be discouraged.
They noted that lending has become riskier with a noticeable increase in default rates as banks are under significant pressure to restore and improve net interest margins, interest earning assets, while ensuring that non-performing loans remain below the threshold set by the Central Bank of Nigeria.
In addition, PwC advocates that corporates and their bankers explore the use of informal restructuring workouts to preserve shareholder value and reduce the required specific provisions for non-performing loans.
These informal restructuring arrangements between creditors and debtors according to PwC, will prevent greater loss and through this, the banks can work with the distressed debtors to resolve financial difficulties that would otherwise likely lead to liquidation.
In a report titled: ‘The use of restructuring to preserve value’, economic activity in Nigeria has declined, driven by low crude oil prices, reduced public spending, reduced Gross Domestic Product (GDP), depreciation of the Naira and limited access to foreign exchange, noting that the challenges have negatively impacted the financial performance of most businesses.
An Associate Director in PwC Nigeria’s advisory deals practice, Seyi Akinwale urged firms to maintain an experienced and well-resourced finance team, embark on proper and careful tax planning and ensure effective performance management and forecasting, adding that such firms should also ensure appropriate and sustainable financing arrangements and communicate constantly with stakeholders.
“Cash flows of many corporate entities/borrowers have been squeezed by tougher market conditions and in some cases lack of appropriate planning and execution. Currently, several borrowers cannot generate sufficient cash flows to sustain their debt burden.
“More than ever, financial managers are saddled with the task of finding solutions to reduce cash outlays especially operating and financing costs. The importance of proactive debt management as an essential part of business strategy in times of market volatility cannot be overstated. Debt burden can very quickly spiral out of control as repayments are missed, penalties mount, and covenants are broken. Soon the business is faced with the threat of bankruptcy or liquidation.
“Open and candid engagement at all stages with financiers is therefore extremely imperative. Increasingly, borrowers are asking commercial banks to
restructure their loan facility”, the report added.
With many loan defaulters opting for informal workouts as a measure to address loan restructuring, the report stated that given the current economic climate and the absence of a formal legal and regulatory framework governing the restructuring process in Nigeria, it is now more important than ever before, to use out-of-court restructuring processes to ensure the survival of many businesses.
