Among the most powerful economic effects of the crisis generated by the COVID-19 pandemic and with immediate impact are impairment of the liquidity levels of companies, especially for those companies active in sectors where activity has been interrupted, such as tourism, restaurants or aviation. However, the economic crisis is just in the early stages and its implications are not yet fully known. Therefore, it is cautious for companies in all fields of activity to analyze potential solutions for preserving their liquidity, even more so as financial predictions during this period are marked by uncertainty.

An indicated approach is for the liquidity maintenance strategy to contain several components, depending on the specific nature of the company's activity. Thus, it is advisable that the company does not rely on a single solution for preserving liquidity, such as applying for a loan or suspending payment of utilities or rent. Even if, in the short term, these measures have the potential to save a company from collapse, the medium- and long-term impact on the company’s degree of indebtness must be carefully considered. In this context it is recommended to use a mix of convergent measures, which would thus limit the company’s exposure after the initial shock phase has passed.

Also, a multi-angle approach, accompanied by a well-grounded plan, will increase the chances of the company to be deemed as a trusted partner for banks or potential investors alike, therefore increasing the likelihood of receiving financing or capital infusion in a critical period.

In addition to the widely discussed and analyzed solutions such as cutting costs, sending employees into technical unemployment, accessing a bank loan, renegotiating agreements or suspending payments, there are other measures that can be taken into account by companies intending to prevent or minimize the liquidity crisis caused by the pandemic, as detailed below. Please note that these measures are not exhaustive, but they can serve as a starting point for a more comprehensive picture of the options companies have at hand.

        1. Dividends 

Shareholders may agree on certain restrictions with respect to the distribution of dividends related to the profit registered by the company for 2019, at least until the financial indicators become more stable and more predictable. Depending on how affected the company’s activity is, measures regarding the distribution of dividends can be extended for a longer period, of several years. Among restrictions we can include stopping the distribution of dividends altogether for a certain period or establishing a threshold for the profit below which dividends will not be distributed. Also, companies that have opted for quarterly distribution of dividends may return to annual distribution. In order to avoid any disputes between shareholders, it is advisable that these restrictions are implemented directly in the articles of incorporation of the companies, as well as, if any, in the shareholders' agreements.

2. Exchange agreements

Also, in certain cases, dictated by the specific nature of the activity, companies can consider concluding exchange agreements instead of the sale-purchase agreements - thus limiting the circulation of cash. Parties to the exchange agreements have the obligation to transfer to each other the ownership over an asset, each party acting both as seller and as buyer. If the exchanged assets do not have the same value, the law allows the difference in value to be compensated through a sum of money.

        3. In-kind contributions

In another case, the company may envisage acquiring a strategic asset which could make the difference in successfully overcoming the crisis, but it does not have the necessary capital for the acquisition and cannot use the exchange method detailed above. In this case, shareholders can analyze the possibility of this asset being contributed to the share capital of the company, by way of increasing the share capital with in-kind contribution. Basically, the company "pays" for the asset by issuing shares, and the seller of the asset becomes a shareholder of the company. However, it is important to note that measures resulting in the entry of a new shareholder must be taken with careful consideration because, once inside, the cases in which a shareholder can be excluded from the company are limited.

         4. Capital injections

Even though at this point some investors prefer to wait for the economic effects of the crisis to clarify before deciding on new investments, in certain areas, such as the tech field, investment levels are expected to be maintained and, in certain cases, even increase. These trends come amid new opportunities available on the market as a result of the crisis generated by the pandemic, which require, among other things, working remote. The capital can come either from an existing shareholder or through a new investor. Especially in the latter case, due to the fact that it enters the company in a critical moment, it is possible for the new investor to use its advantageous position and impose special requirements, for example in terms of the allocated stake or the company’s decision-making process, requesting more control over the strategic decisions of the company.

         5. Shareholder loans

This solution should be regarded as a starting point in case the company reaches the conclusion that it needs a loan to ensure its liquidity level. If the shareholders have available financial resources, loans from them are sometimes preferable to third-party loans, because of the speed with which they can be accessed. However, it should be noted that shareholder loans must be granted under the same conditions as if such loans would occur between two independent parties. This is also applicable with respect to the interest applied to the loan, which must be at market value.

         6. Debt to equity swap

If the creditor agrees with this approach, the company may choose to not repay the amount of the debt but convert the debt into equity. As a result of this operation, the company will increase its share capital and the creditor will become a shareholder of the company, which will however lead to the dilution of the stakes held by the other shareholders. For this operation to be implemented, the debt must be certain (its existence to be ascertained through a document – e.g. loan agreement), liquid (its amount to be precisely determined – e.g. a sum of money) and due. If it is not yet due, the loan agreement can be amended in order to change the maturity date, followed by the debt to equity swap.

          7. Debt set-off

As with the debt to equity swap, two receivables can be set-off if they are certain, liquid, and due. The set-off can be performed directly between two parties who have debts towards each other, up to the lowest of these two amounts. Also, more complex structures can be put in place, by concluding for example a tripartite set-off agreement (e.g. A owes 50 EUR to B, which in turn owes 100 EUR to C, which owes 30 EUR to A – a tripartite set-off agreement will be concluded between A, B and C, whereby A pays directly to B only 20 EUR, B pays to C 70 EUR and C does not pay anything else to A).

As shown, the solutions that Romanian companies have available, whether addressing commercial, legal or financial strategies, are multiple and the suitability of applying one or several measures depends on the commercial and financial considerations of each economic operator. However, companies need to demonstrate creativity and adaptability to get through this period, and those who will have more chances of survival and recovery will be the ones who will be able to make the most of all available resources.