The effect of Covid 19 will likely impact a significant number of borrowers and lenders alike causing them to review their underlying finance arrangements to assess rights, protections and vulnerabilities.
Please note: the information contained in this legal update is correct as of the original date of publication
The effect of Covid 19 will likely impact a significant number of borrowers and lenders alike causing them to review their underlying finance arrangements to assess rights, protections and vulnerabilities. There may also be a need for borrowers and lenders to consider and assess the ability to draw on existing facilities, refinance, access interim financing or otherwise to inject cash into businesses alongside other alternative cash-conservation commercial measures to address short-term liquidity constraints.
The purpose of this note is to address certain key issues which will need to be considered in loan agreements in the current Covid 19 crisis. The below list is not exhaustive but hopefully is indicative of the considerations which will need to be given and potentially advice sought. It also does not seek to expressly consider what additional considerations may need to be given in respect of the entry into new facilities but many of these will revolve around the same issues.
Other points of note in this respect are as follows: (i) businesses with facilities containing lock-up and sweep mechanics may find themselves facing the possibility of the sweeping of excess cash generated from recent positive performance at a time where that cash could be needed given lock-up tests are often drafted on a forward-looking basis; (ii) ‘runs’ on revolving facility drawings can of course have a springboard effect on the debt service element of these ratios where there is a step-up from commitment fee to margin; (iii) the impact of financial covenants may stretch into other elements of loan agreements including margin ratchets which in turn result in a rise in debt service costs.
It is entirely common for many other general covenants/representations to be qualified by MAE/MAC and so the impact of such distinctions could also stretch into the typical ‘breach of other obligations’ EoD.
The lack of certainty around such provisions can provide challenges for both borrowers (who may want to utilise their facilities and as a consequence be required to certify Repeating Representations and no Default which, in each case, may include a “no MAE” certification) and lenders (who may be considering accessing protections afforded by such term) alike. Moreover lenders tend to be cautious about invoking such clauses as, in the absence of abundant legal precedent, courts are expected to construe such clause narrowly and the risks of an ‘incorrect call’ for lenders can be significant both legally and reputationally.
While the impact of such provisions is of course intrinsically linked to EoDs, there are certain provisions which stand out as particularly relevant in light of Covid 19 and other associated implications for borrowers and lenders will need to be considered.
In addition, businesses looking to take advantage of the ability to delay delivery of audited accounts should consider whether a corresponding consent is required under their loan agreements.
To the extent you require any further information or advice in respect of the above, please get in touch.
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