19th May 2020

Key points to consider when reviewing your finance documentation in light of Covid-19


As noted in our previous blog, borrowers should review their existing debt agreements and related guarantee and security documents to assess whether any contingency measures are necessary. Areas to consider include:

  1. Representations: Facility agreements generally include representations making factual statements on various aspects of the business which repeat throughout the life of the loan, such as on interest payment dates. If there have been changes in circumstances as a result of the COVID-19 pandemic, a borrower should check the statements to ensure that these are still accurate prior to be being repeated. An inaccurate statement can trigger an event of default.
  2. General covenants: Borrowers should ensure that they can still comply with all general covenants and whether, given changes in circumstances, any grace periods or thresholds are still sufficient or achievable. A borrower is likely to require the consent of an existing lender to new debt.
  3. Information covenants: Given logistical difficulties, borrowers should check that they can still deliver financial information and reporting to lenders on time and in the format required. They will also require to consider if there is additional information which now needs to be disclosed.
  4. Financial covenants: If included in a facility agreement, financial covenants which test financial performance are a key monitoring tool for lenders. Borrowers need to check what impact items such as lower cashflow, reduction in valuation of assets and goodwill will have on the applicable calculations and their ability to comply with the ratios prescribed. Borrowers should also look closely at the definitions to examine what inclusions and exclusions there are to the calculations, for example how do the definitions treat one-off costs? Borrowers should also investigate whether a breach of a financial covenant can be “cured” for example by the injection of additional capital.
  5. Material Adverse Change/Material Adverse Effect (“MAC”): This is a “sweep-up” event of default. It allows a lender to capture unforeseeable events or circumstances that have (or may have) a significant detrimental effect on a borrower’s business. Whether or not the impact of COVID-19 will trigger a MAC event of default will depend on the specific drafting of the clause, the specific circumstances and the impact that this has on the applicable borrower. If your debt documents contain a MAC clause, consider how you could demonstrate that the MAC has not been triggered.
  6. Payment/repayment: Borrowers need to consider if they will (or may) be unable to meet their obligations to make scheduled payments of interest and repayments of principal. If so, it may be sensible for a borrower to seek to defer or restructure the debt. Another possibility may be to seek the lender’s agreement for interest to be rolled up and capitalised on a temporary basis.
  7. Additional events of default: In addition to payment defaults, events of default triggered by misrepresentation, covenant breach and a MAC event of default, other events of default may be relevant. These include:
    1. Insolvency-related events of default – these may be triggered if a borrower is seeking a rent reduction from its landlord or is seeking to re-negotiate or reschedule any other debt or payment terms in anticipation of cashflow difficulties;
    2. Cross-default – this may be applicable if a borrower has facilities with other lenders – if one lender seeks to call a default this will generally automatically trigger a default with each other lender;
    3. Cessation of business – may be triggered if a borrower has suspended part of its business or closed some offices;
    4. Litigation – depending on the nature of the borrower’s business and the terms of its commercial contract arrangements it may be subject to claims if it is no longer able to perform its obligations under those contracts due to the pandemic.

Facility agreements also typically include an obligation to notify the lender of any event of default. Borrowers should check the specific wording of this clause. Failure to notify will, itself, generally be an event of default.

The occurrence of an event of default will ultimately give a lender a right to accelerate the debt (ie demand repayment) and take steps to enforce security. It is therefore important to be proactive and enter dialogue with lenders at an early stage and keep them alert to any necessary support, consents, waivers and/or amendments to facilities which may be required either immediately or in the future.

Please contact any member of our corporate team if you require assistance in reviewing your existing finance arrangements or in considering your borrowing requirements moving forward.

Suzi Low,
Associate Solicitor
Corporate & Commercial
Blackadders LLP



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