Financing arrangements: the impact of COVID-19 for borrowers

As we all adjust to the ‘new normal’ of working from home (and the practical changes this has made to our daily lives), it is also important to consider (and plan for) the short and longer term impacts of the COVID-19 pandemic on financing arrangements.  Lenders will want to review their portfolios to assess changes in credit risks. Borrowers will need to review likely impacts on their business, and also anticipate how their budgets and business plans may change and what their changing financing and liquidity needs may be. As amendments may need to be made to finance documents (which could take longer to finalise than in normal times), it is advisable to identify and seek to resolve potential issues in good time before documentary deadlines such as planned drawdowns and covenant testing dates are reached. 

Liquidity and cashflow 

Liquidity and cashflow are likely to be the first issues to be contemplated. Borrowers may wish to consider whether they can draw remaining available commitments (perhaps through revolving credit facilities or overdrafts) early to the extent they can under the existing documentation.  

Other potential short-term solutions (which will require amendment of the finance documents) may be discussed with lenders.  These include: 

• Deferral of interest payments for a fixed period of time.
• A switch to PIK interest if there are sufficient term loan commitments available to be drawn.
• Accrual of interest payments.
• Deferral of scheduled amortisations of loans.
• Holidays from certain mandatory prepayments.
• Amendments to equity cure provisions (if there are projected financial covenant issues or to change the way in which equity injected into the business is to be used). 

Changes to business 

The other immediate issue which borrowers may be grappling with is how to adapt their business to weather this storm. Changes to business and entering into new material contracts, for example, are matters which usually cannot be done without lender consent. If significant cash or capital expenditure is to be used to reposition the business, this may also require lender consent and will have an impact on business plans and the calculation of financial covenants. Consideration must also be given to whether existing key contracts can continue to be complied with if there is disruption to areas such as relevant supply chains – failure to fulfil undertakings in such contracts are likely to cause an Event of Default under finance documents, and will need to be raised and discussed with lenders in order that solutions can be found. 

Other documentary issues 

Other documentary issues to be reviewed and considered include: 

• Representations - for example, whether at the next repetition date (usually either the next Interest Payment Date or each day) there will be any material adverse change since the last delivered financial statements.  It is likely a misrepresentation will be an Event of Default and further drawdowns will not be permitted if all repeating representations are not true on the proposed date of drawdown.  Other important representations to consider include the accuracy of financial statements more generally, breach of material contracts and that there is no Default.
• Information undertakings – for example, whether there will be there any practical difficulties in delivering the required financial and other information in the timelines required – this will include ascertaining whether auditors will be able to audit accounts on time and whether compliance certificates can be delivered (especially if compliance certificates require a statement that there is no Event of Default).  There are also related risks, such as whether there may be a qualification made by the auditor in the accounts.
• Financial covenants – for example, the impact of any expected decrease in EBITDA, and whether any changes are required to the defined concepts used to calculate financial covenants (such as how lost revenues and insurance proceeds are to be treated). On the other side of financial covenant calculations, consideration must be given to any increase in debt which is proposed.
• Undertakings – for example, whether any additional financial indebtedness needs to be permitted and changes to the borrower’s business.
• Events of Default – for example, adjusting Material Adverse Effect provisions to ensure that they are not triggered by COVID-19 issues.  Other issues will include any breaches of material contract, misrepresentations (as a result of repeating representations ceasing to be true), non-payment of other debt and any issues around solvency. 

If you would like to discuss any of these issues further, please do contact Partner Jon Bond, Senior Associate Susan Mitchell or your usual CRS contact.