Stand Still Finance

Standstill finance, also known as moratorium financing or rescue financing, is a type of emergency funding provided to companies facing significant financial distress. It’s essentially a temporary agreement between a struggling company and its lenders to "stand still" on certain loan obligations, providing breathing room and a chance for the company to restructure and stabilize its operations.

The core idea behind standstill finance is to prevent a rapid collapse due to immediate debt demands. Instead of lenders immediately pursuing foreclosure or legal action for missed payments, they agree to temporarily freeze (or modify) certain payment terms, covenant compliance requirements, and enforcement actions. This buys the company time to develop and implement a turnaround plan.

Key Features of Standstill Finance:

• Temporary Relief: Standstill agreements are inherently temporary, typically lasting for a defined period (e.g., a few months to a year). The goal is to provide short-term stability while a longer-term solution is sought.
• Negotiated Terms: The specific terms are heavily negotiated between the company and its lenders. This can involve payment deferrals, covenant waivers, interest rate modifications, and even new lending to provide working capital.
• Conditions and Requirements: Standstill agreements usually come with stringent conditions. The company will be required to provide detailed financial information, develop a comprehensive restructuring plan, and agree to oversight from the lenders. Lenders may even demand a seat on the board or appoint an advisor to monitor the company's progress.
• Increased Security for Lenders: In exchange for providing forbearance, lenders often demand improved security positions or higher priority in the event of a liquidation. This can involve pledging unencumbered assets or gaining a senior claim on existing collateral.
• Good Faith: The success of standstill finance hinges on the company demonstrating good faith and a genuine commitment to restructuring. Transparency and open communication with lenders are crucial.

Benefits of Standstill Finance:

• Avoids Immediate Liquidation: Prevents a fire sale of assets and gives the company a chance to salvage value.
• Preserves Jobs: Can help to maintain employment during the restructuring period.
• Allows for Restructuring: Provides the necessary time and resources to develop and implement a strategic plan for recovery.
• Potential for Higher Recovery: Lenders may ultimately recover more through a successful restructuring than through immediate liquidation.

Risks and Challenges:

• No Guarantee of Success: Standstill finance is not a guaranteed fix. If the underlying problems are too severe or the turnaround plan is flawed, the company may still fail.
• Complex Negotiations: Negotiating a standstill agreement can be complex and time-consuming, especially when multiple lenders are involved.
• Potential for Moral Hazard: Companies may misuse the breathing room provided by standstill finance, delaying necessary changes or engaging in risky behavior.
• Cost: Standstill finance can be expensive due to legal fees, advisory fees, and potentially higher interest rates.

In conclusion, standstill finance can be a valuable tool for companies in financial distress, providing a lifeline to restructure and avoid immediate collapse. However, it's crucial to approach it strategically, with realistic expectations and a clear understanding of the risks involved. It is often a stepping stone towards a more comprehensive restructuring, which may involve debt restructuring, asset sales, or even a formal insolvency process.