The outbreak of coronavirus (COVID-19 / SARS-CoV-2) will undoubtedly not be without impact on the factoring industry's operations. In this article, I will try to outline in points an outline of this impact from a peri-legal point of view. The article, in order to keep it concise, only signals problems that, in the author's opinion, have already occurred or may yet occur.
- Impact on factoring agreements
The coronavirus pandemic is a phenomenon that many lawyers already consider a force majeure. The current epidemic should generally not affect the effectiveness and execution of factoring agreements. However, if the parties in the contract (regulations / T&Cs) reserved a force majeure clause then the scope of its application depends on the content of the clause itself, and may result, for example, in the exclusion of liability for non-performance / improper performance of obligations (in particular, exclude the application of contractual penalty) or limit / exclude certain contractual obligations. There must be a causal connection between the non-performance / improper performance of the contract and the state of force majeure. That is, the coronavirus can not just be a convenient excuse for non-performance of an obligation (e.g., failure to pay, failure to provide documentation).
In at least one model contract that I am aware of, I have encountered a clause as that the factor "shall not assume liability to receivables whose repayment is threatened due to force majeure (...)." This type of provision may now be subject to testing, including in terms of its consequences. It seems that in such a situation the factor applying it should clearly announce to factoring companies whether the provision has been applied and to what extent, and assess the impact of this situation on the fees associated with full factoring.
If There is no force majeure clause in the contract, The parties may try to invoke general principles and seek a possible exclusion of the obligation to compensate for damages resulting from non-performance or improper performance of an obligation (no fault of the debtor). For example, this may include liability for violation of deadlines, accrual of late fees, contractual penalties, etc.
- Impact on debt from factoring agreements
Coronavirus pandemic does not result in any deferral or postponement of the maturity of obligations under the factoring agreement or purchased receivables, recourse periods, etc. The misconception of some factotumers in this regard stems from referring to the positions of, for example, the ZBP, without reading their content (I refer here to point 16 below).
- Impact on commercial contracts covered by factoring
A more complicated issue is the impact of the coronavirus outbreak on commercial contracts covered by factoring - here, each contract should be examined individually for a possible force majeure clause and the consequences associated with it, which can range from limited (e.g., removal of contractual penalties, limitation of liability) to drastic - even annihilating receivables (e.g., exercising the right to withdraw from a pending contract with unpaid receivables financed by the factor). Knowing the market conditions, it is particularly intensive to look at construction contracts and contracts concluded in the execution of a public contract. It is crucial to maintain constant contact with the factor so as to have up-to-date knowledge of possible legal declarations (such as withdrawal from the contract).
- Impact on accounts receivable insurance
Any factoring company on a full factoring facility these days should reach out to the policy and T&C in terms of assessing whether a force majeure qualifiable event has occurred and what effects are defined by such a clause in the policy/T&C. In case of doubt, one would need to request a binding position from the insurer. In addition, it may be a matter of time before insurance limits related especially to loss of liquidity and increased risk for specific industries (e.g., HoReCa, aviation) are changed.
- Impact on funded industries
As indicated above, it is apparent that some industries are already feeling the crisis to a significant degree (e.g. HoReCa, passenger transportation), some are operating without major changes (e.g. housing construction), and still others have only received a temporary increase in margins and profitability (e.g. international transportation, especially on refrigerated trucks - with the simultaneous drop in fuel prices), and still others are beneficiaries of the new situation and are making a large number of profitable transactions (e.g. biomed industries, medical care equipment, cleaning products, food industry). Note that a slowdown in one industry (e.g., HoReCa) entails a slowdown in coexisting industries (e.g., gastro equipment manufacturers, laundries performing services for hotels, etc.).
- Impact on risk / portfolio
The above is undoubtedly likely to affect factoring companies' evaluation of their client portfolios, factoring limits and counterparty limits in terms of reducing exposure to risk while granting more leeway to counterparties who are beneficiaries of the market situation. It seems that the risk departments will have to somewhat rearrange their previous way of operating in terms of the dynamically changing market conditions. Additionally, where the insurer/lender/parent company imposes guidelines/conditions on the factoring company as to the portfolio (possibly covenants) - these issues can affect the modification of the portfolio.
- Impact on security levels
With classic factoring secured in a balanced manner (portfolio of dispersed counterparties + e.g., promissory note), this impact will not be significant beyond a general increase in past due receivables and default risk, unless a significant portion of the portfolio is made up of customers in higher risk industries (e.g., HoReCa, aviation). In the case of real estate (mortgage-backed), it is too early to talk about price movement in the market. I expect a more dynamic price decline on industrial real estate due to the increased number of bankruptcies and lower demand for such properties, as well as their difficult marketability due to company-specific profiling. The largest and most noticeable decline that occurred immediately was the collateral in the form of registered pledge of shares of companies listed on regulated markets (WSE/New Connect). Progressing since the end of February, the discounting of most companies has reached from several to tens of percent, and in extreme cases (e.g., Rainbow Tours, Enter Air) even more, resulting in a huge drop in the market value of the collateral. A similar situation exists for collateral on certain corporate bonds. Where this is stipulated in the factoring agreement, there may be a right to demand additional collateral.
- Impact on companies' liquidity
It requires no special comment that the impact on companies' liquidity can be drastic, depending on the particular industry. I also point out an overlooked aspect - in the case of larger entities issuing corporate bonds there may be a problem with rolling them over. The worst may be the liquidity situation of companies that are simultaneously (i) heavily indebted, (ii) in high-risk industries, and (iii) with a high proportion of fixed costs - example: CCC.
- Impact on the existence of companies
In addition to a huge increase in applications for business suspension and liquidation, we should expect a surge in applications for restructuring / bankruptcy. Among large companies - mainly listed on the regulated market, we already have the first examples which we can more or less associate with the coronavirus epidemic (e.g. Braster S.A., Wolska Aparthotel, Marka S.A., Fince Holding S.A., CTE).
- Impact on recovery
Congestion is growing. Some debtors are already explaining the delays with coronavirus, which sometimes gives the impression of a situational translation (especially on obligations many months overdue). Most courts have already lifted court dates for the entire month of April, but injunction cases are ongoing. There are problems with the circulation of correspondence. Trial and court deadlines do not start, and those that have started are suspended for the epidemic period. In addition, there are impediments to the work of bailiffs, including the performance of actions involving debtors. Rather, the market is discounting a decline in debt collection effectiveness (take a look at the valuation of Kruk on the WSE, for example). A professional assessment of the potential impact of the coronavirus on debt collection and collectability can be read by looking at the ESPI current reports of listed debt collection companies - e.g. Kruk, Vindexus, Getback, Aforti Collections.
- Impact on Fraud
In view of the difficult liquidity situation and the pressure on many factoring companies, I expect to see an increase in the percentage of factoring fraud, including an increased number of submissions for financing fictitious transactions. Already there is an increased interest in using factoring limits "under the cork" every single zloty, which is a worrying sign.
- Impact on profitability
The MPC's decision on March 17, 2020 to reduce the NBP reference rate by 0.5 percentage points, i.e. to a historically low level of 1.00 percent, by virtue of its impact on the WIBOR level, may affect the profitability of the factoring industry - both in terms of the factoring company's side of raising capital (e.g., line of credit, bonds) and factoring financing (where the margin is also composed of WIBOR).
- Impact on capital requirements
Due to the reduction of the systemic risk buffer to 0% by the Finance Minister's Decree of March 18, 2020, the minimum regulatory requirements for banks' capital ratios have decreased (Tier 1).
- Solutions of the so-called Anti-Crisis Shield vs. factoring
At the beginning of April this year, a law - the so-called "crisis shield" - went into effect (Law of March 31, 2020 on amending the Law on Special Solutions for the Prevention, Prevention and Suppression of COVID-19, Other Communicable Diseases and Emergencies Caused by Them and Some Other Laws). Unfortunately, despite the proposals put forward by the PZF, the new regulations contain few changes that directly affect the factoring industry. Here are the most important ones:
(1) the introduction of so-called credit vacations. Credit vacations consist in postponing (suspending) the repayment of principal and interest installments or capital installments. With regard to the factoring industry, measures to extend so-called credit vacations also for factoring receivables have already been taken by at least two banks (temporary suspension of installment payments).
(2) one-time loan for micro-entrepreneurs. The Starost, on the basis of an agreement, may grant a one-time loan of up to PLN 5 thousand from the Labor Fund to cover the current costs of micro-entrepreneurial activity.
(3) Postponement of deadlines. Deadlines have been postponed - among others, for reporting data to the CRBR, for filing a notice of payment to an account outside the so-called white list of VAT taxpayers (up to 14 days), for filing the annual PIT by May 31, 2020, for the obligation to file the new JPK_VAT with the return, application of the new VAT rate matrix (with minor exceptions).
(4) exemption from the application of bad debt relief from debtors under the conditions specified in the law (including failure to pay the obligation within 90 days of the due date, negative economic consequences of COVID-19, lower revenues, etc.).
(5) Suspension of procedural and judicial deadlines during a state of epidemic emergency or state of epidemic declared due to COVID-19.
The regulations, however, are not final regulations. The Finance Minister stressed that another speculative law is being drafted to help companies in the wake of the COVID-19 outbreak.
- Influence on industry events
Movement restrictions also mean restrictions on industry training, meetings and events. CRIF Ltd. was the first to announce that the Risk & Supervision Meeting 2020 conference has been moved from April 22, 2020 to September 10, 2020. Also, expect the risk of postponement/cancellation of the XI International Factoring Congress. We will certainly all miss each other.
- Assessing the impact on factoring of the stakeholders themselves
- Posts by ZBP, PZF
- ZBP presented its position in the communication no. 1 dated 16/03/2020. and communication no. 2 dated 31.03.2020. recommending that "banks that have a factoring company in their capital group should take steps to apply deferral of repayments due from customers on a basis analogous to that applied by the bank to deferral of loan repayments."
- The PZF presented 7 pillars of factoring assistance for companies in the era of the COVID-19 coronavirus pandemic. He submitted them to the ZBP and its crisis management team. The initiative is based on the application of extraordinary measures, allowing companies, faster and easier access to funds for operations, and their counterparties, among others, to extend payment terms or defer payment of dues.
- Companies' positions
Due to the obligations incumbent on issuers of shares listed on the regulated market (WSE, New Connect), we already have the opportunity to learn about the estimated impact of the coronavirus outbreak on companies' operations. In terms of the factoring industry, such ESPI current reports have already been published by banks (among others. PKO Bank Polski, Alior Bank S.A., Bank Polska Kasa Opieki S.A., ING Bank Śląski S.A.) although few of them refer directly to factoring, and non-bank factoring companies (Pragma Inkaso S.A.: Law firm - WEC Incaso S.A.. Aforti Holding S.A.). I encourage you to read the reports because you can read from them the expected assessment of the situation by those involved themselves.
The above assessment is only an outline of the issues arising from the author's current estimates. Each factoring company should relate the impact of the coronavirus individually to its own operations, taking into account its own contractual patterns, customers and requirements.
