A Government Tender, a Callable Line and a Covenant With 4 Points of Headroom
A listed pharmaceutical distributor prepares a 13-week direct cash flow forecast. Opening cash is PKR 620 million. It has a committed revolving facility of PKR 500 million (60-day tenor, subject to a 30-day annual clean-up test) and uncommitted lines of PKR 900 million, of which relationship banks have historically withdrawn about 40% at each quarter-end. The forecast shows a cumulative deficit of PKR 480 million in week 6 and PKR 1.05 billion in week 9, driven by a single government hospital tender that pays 120 days after acceptance. One customer accounts for 38% of receivables and has stretched payment from 45 to 78 days over two quarters. The loan covenant requires a current ratio of at least 1.20 and net debt/EBITDA of at most 3.5x; the current ratio is 1.24. The treasurer proposes to fund the gap from uncommitted lines and to delay supplier payments by 30 days.
1. Assess how much confidence can be placed in the forecast and whether the available liquidity buffer is adequate.
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Forecast reliability. A 13-week direct forecast is only as strong as its two largest lines. Here the week-9 PKR 1.05bn peak rests on a single government receivable that pays 120 days after acceptance - so the model must anchor on acceptance documentation, not the invoice date, and must carry a probability-weighted alternative for accepted / delayed / rejected. The 38% customer moving from 45 to 78 days is a trend, not noise: extrapolate it or model a further slip, don't average it away.
Buffer arithmetic. Dependable liquidity = PKR 620m cash + PKR 500m committed = PKR 1.12bn. Against a PKR 1.05bn peak that leaves PKR 70m (about 6%) - far below any defensible minimum buffer of 10-20% of peak requirement or 2-3 weeks of operating outflows.
Why uncommitted lines cannot be counted. Historical quarter-end withdrawal of 40% means only about PKR 540m is realistically available, and it tends to disappear precisely when the company needs it. Banks withdraw uncommitted lines on their own credit appetite, not on your forecast.
Stress test. Delay the government receipt by 30 days, or lose 15% of the top customer's volume, and the peak deficit exceeds committed liquidity. On any reasonable stress the buffer is negative - which means the funding plan is a hope, not a plan.
2. Critique the treasurer's funding proposal and rank the alternatives available to close the gap.
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Problems with the proposal
- Uncommitted lines are callable and pro-cyclical. Building a 13-week plan on them converts a liquidity problem into a refinancing cliff.
- Clean-up test. The revolver must be undrawn for 30 consecutive days each year. If the week-9 peak overlaps that window, drawing it breaches the facility - and a breach makes the committed line itself callable.
- Covenant arithmetic. Drawing PKR 500m adds a current liability: current assets 12.9bn / current liabilities 10.5bn ≈ 1.23 versus a 1.20 floor. Every draw shrinks headroom, and the forecast EBITDA is itself uncertain.
- Stretching suppliers 30 days is an unfunded loan from parties who can retaliate through price, allocation and quality. It also flatters the current ratio without changing cash economics.
Ranked alternatives
- Extend or term out the committed facility beyond the clean-up window - solves the structural mismatch, not the symptom.
- Accelerate the government receivable: complete acceptance documentation early, milestone billing, and discounting where the customer permits assignment.
- Targeted supplier finance on non-critical spend rather than a blanket 30-day stretch.
- Tighten credit and credit-insure the 38% customer; escalate to a payment plan.
- Reduce inventory in the slowest SKUs.
- Shareholder or group support - last resort, highest signalling cost.
3. Design the early-warning indicators and contingency funding plan triggers you would put to ALCO, with owners and actions.
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A contingency funding plan is only useful if the triggers are objective and the actions are pre-agreed and pre-approved. Suggested set:
| Indicator | Amber | Red | Pre-agreed action |
|---|---|---|---|
| Dependable liquidity (cash + committed undrawn) | < PKR 800m | < PKR 450m | CFO activates CFP; draw committed, freeze discretionary capex |
| Revolver utilisation | > 60% | > 85%, or clean-up window at risk | Treasury opens backup facility discussions with two banks |
| Any uncommitted line withdrawn or repriced | any | - | Immediate re-forecast; treat remaining uncommitted as zero |
| DSO / top customer | > 85 days or 15 days past revised terms | > 95 days | Credit committee; stop-supply decision escalated to CEO |
| Government acceptance not received | 45 days before week 9 | 20 days before week 9 | Alternative funding arranged; tender milestone review |
| Current ratio | < 1.22 | < 1.20 | Pre-emptive lender waiver discussion, not post-breach |
Governance points. Each trigger needs a named owner (CFO, treasurer, credit manager), a decision deadline, and a standing ALCO agenda item. Test the CFP at least annually with a live fire drill - an untested plan is a document, not a plan. Record in the plan that uncommitted lines are excluded from dependable liquidity at all times, which prevents the next treasurer from rebuilding this same forecast.