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.
When can you set off claims against different elements of a project
The Court’s decision raises important drafting considerations for construction contracts involving multiple elements of a project.
Drafting terms and conditions or negotiating a contract? Be wary of "unusual" and "exorbitant" exclusion clauses
When drafting a set of terms and conditions, companies must adhere to the requirements contained in the Unfair Contract Terms Act 1977
Stop, collaborate and listen: Top 10 Tips with Collaboration Agreements
Providing you with the top ten tips on collaboration agreements - what should you know?
Preparing your company for sale
We set out here some initial steps to consider in anticipation of a sale.
ESG investment and the challenges for trustees
What challenges does the ESG revolution present for trustees of private family trusts?
The impact of COVID-19 on commercial and residential tenancies
What impact has COVID-19 had on commercial and residential tenancies? Read more here.
Charles Russell Speechlys advises discoverIE on its acquisition of Antenova
discoverIE is a leading international designer, manufacturer and supplier of customised electronics to industry.
Q&A: Separate blocks, common parts and enfranchisement
Miriam Seitler and Lauren Fraser answer queries relating to leaseholders seeking to acquire the freehold.
Coded messages for landlords and tenants
“What does the code of practice mean for landlords and tenants? Read more here”
The family court’s role in micro managing 'trivial' disputes
The recent decision has dealt with the family court’s role in micro managing “trivial” disputes in relation to children
Taxing horizons and fiscal black holes
A super-massive black hole at the centre of the nation’s finances means that tax reform and rates rises look increasingly likely.
Charles Russell Speechlys advises Acora on acquisition of Westgate IT
Westgate IT specialises in providing IT support to businesses in the South West.
Q&A: Wrestling with restrictive covenants
Camilla Lamont (barrister at Landmark Chambers) and Real Estate Disputes Partner Emma Humphreys answer a pair of covenant queries
Charles Russell Speechlys advises Grape Paradise on the acquisition of a fine wine business
Charles Russell Speechlys has advised Grape Paradise on the acquisition of the Sarment Group in the China Mainland territories.
Grab the tail by the horns - Why is tail spend so critical in today’s outsourced portfolio?
It’s usually invisible, but in all likelihood, you’ve got tail spend.
Jessica Arrol Caws
Good news for offshore private banks: the overseas persons exclusion is here to stay
Collateral Warranties – Are they also a ‘Construction Contract’?
What are collateral warranties and what do they mean for your construction contracts? Read more here.
Succession Planning for Landed Estates
The first in our series of articles on succession planning for landed estates covering a wide variety of matters.
The Digital Dispute Resolution Rules – How Novel Are They?
Sonia takes an in-depth look at The Digital Dispute Resolution Rules
The Business Magazine, Insider Media, Business South and The Surrey Chambers of Commerce report on the firm's involvement in Appital's £2.5m growth capital investment
The injection will accelerate the development of Appital’s technology infrastructure, integration with financial institutions.