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Managing Counter-Party Risk in the Pandemic – Part III:

Part III: Supplier considerations: Assessing and leveraging your leverage

As most global markets attempt a return to normal (or a new form of normal) business, it is hard to imagine a sector or an industry that isn’t already reeling from the effects of the past three months. Getting back on your feet is hard enough in the current environment, without having to worry about further setbacks impacting your business. But how would you react if your key supplier called tomorrow to let you know that they were insolvent and unable to provide you with goods or services? Worse, what if you had already placed (and paid for) a large order with them that was critical to your ability to continue business?

In addition to the customer risk mitigation measures we looked at in Part II of this series, management needs to have in place systems and options to avoid the impact of supply-chain risk. Continuously monitoring your supply chain is essential during this period, to avoid the risk of your suppliers’ misfortunes infecting your own business (particularly for your critical suppliers and those for which there doesn’t appear to be a possible replacement).

But what is the legal position? What can (and can’t) you do if you catch wind that your key supplier is about to pull down the shutters? In the US, a termination provision in your supply agreement allowing you to terminate for insolvency or bankruptcy events (so-called ipso facto clauses) is completely unenforceable. In fact, any

Managing Counter-Party Risk in the Pandemic – Part II

Part II: Customer Considerations: Risk Mitigation = Smarter Sales

In the coming months, very few companies, whether public or private, will be able to avoid including statements in their quarterly reports or financials that attribute single or double digit percentage declines in revenue to doubtful accounts and insolvencies of major customers caused by the pandemic. For many, if not most, that disclosure will continue beyond Q4 of 2020 and through 2021.

In prior periods, lenders and other key stakeholders may have been tolerant to these one-off, non-systematic declines due to unanticipated insolvencies of customers (and the ability to replace the revenue/income either through liquidation of collateral or replacement of customers). After all, none of us have a crystal ball, and many of the insolvencies were unforeseen (or unexpected). To the extent they had it, lenders and other creditors didn’t have to worry about being able to liquidate collateral – a market was almost always available to sell collateral (or sell their products elsewhere), and there was plenty of money in the market to facilitate transactions (and curb the downside risk).

Post-pandemic, while companies may still not have crystal balls, they at least have tarot cards and Ouija boards – and the signs are strong that market participants will be impacted across industries on a global basis. Lenders and other key stakeholders will want to know what measures were taken to mitigate those reported declines, particularly if the secondary markets to mitigate risks of nonpayment will be stretched (or perhaps non-existent)

Managing Counter-Party Risk in the Pandemic – Part I

Part I: Getting on the Same Page

Globally, boards and management teams are taking stock of current operations and finances to identity vulnerabilities to the unprecedented distress that markets are anticipating from the pandemic for the next 12-18 months.  As part of those discussions, many retail businesses (and those with operations related to retail, like landlords, logistic companies, shipping interests, etc.) are focusing on receivables and risk weighting as to the collectability and the follow-on impact of doubtful accounts.

These conversations will inevitably lead to the age-old conflict that pins finance and legal functions – that are largely focused on risk – against business/sales functions, which are generally focused on sales and keeping customers happy.  Pre-pandemic, sales teams historically had a leg up as revenue generation inevitably trumped risk mitigation in the context of strategic decisions.  However, the same behavior and cultures that have been allowed to prevail when there was only a handful of distressed counter-parties cannot persist where companies are now dealing with entire portfolios of customers and vendors in varying degrees of stress and distress.

To be effective with mitigation, it means that Finance, Legal and Sales need to quickly get on the same page in terms of identifying the level of risk each counterparty poses to the business (and how that counterparty’s inability to pay or deliver goods/services will impact the overall business).  In doing so, companies will be better able to allocate scarce resources to counterparties that pose the greatest degree of near-term risk while

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