June 11, 2020
Authored by: LaDawn Naegle
As public companies continue to manage vulnerabilities attendant to the global pandemic and its widespread economic consequences, counter-party risk assessments and careful management of those risks can be critical. In a series of ongoing posts to our Retail Law blog, our restructuring and special situations team provides a useful paradigm for analysis and action. The points made in this series are equally applicable to companies in many other industries.
Our special situations team discusses the importance of getting the finance and legal functions of the business on the same page as the sourcing and sales functions. As they point out, to be effective with mitigation, all parts of the business need to quickly align 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 carefully watching future performance through the same filtered lens. To help think about the analysis, the team has created a Heat Grid for Triaging Counter-Party Risk that can serve as a one-page resource.
Companies should look both at their customers and their suppliers in assessing risk and addressing mitigation measures. The point is to be intentional about better assessing particular customer or supplier risk, putting processes in place to protect payment and exposure, and ensuring that all business functions are appropriately engaged and aligned.
As this fiscal year unfolds, many public companies may find the need in upcoming quarterly and then annual reports to disclose revenue declines due to doubtful accounts and insolvencies of major customers caused by the pandemic. Similar supply chain issues could give rise to production or shipment delays that could also adversely affect revenues. It will be important to share with investors measures taken to proactively assess and mitigate any such declines.