COVID-19: Practical Issues for Borrowers
02 April 2020
The last few weeks will have presented challenges for many borrowers and attention will have turned to existing financing arrangements and the potential need for new financing arrangements.Those needs will vary but there are a number of considerations which are likely to be common across the board and we offer below some practical tips and considerations for borrowers to consider in the immediate stages.
1. Review existing loan agreements. Borrowers should be reviewing terms of existing loan agreements.In particular consider whether changes in the past few weeks since COVID-19 have resulted in any breach of the terms or defaults occurring, or indeed whether these may occur imminently.
2. Be aware of key provisions. Loan facilities will often contain a number of key clauses for borrowers to consider when carrying out a review.
- Financial covenants
- These are covenants contained in some loan agreements which require a borrower to comply with financial tests or metrics during the life of a loan or at set “test intervals”.
- Common examples include: (I) Interest-Cover Ratios (EBITDA to Finance Charges), (II) Cashflow Cover (Cashflow to Debt Service Levels) and (III) Minimum Net Worth requirements.
- In many cases a breach can result in an event of default under the loan. In some cases grace periods to rectify a breach may have been included.
- If the borrower is aware of a potential breach this may need to be flagged to the lender under the terms of the loan.
- Lenders will often have powers to investigate breaches and request information from the borrower in order to do this.
- General undertakings / covenants
- These are general provisions which set out things that the borrower must and must not do during the life of the loan.
- Common examples include (I) negative pledges, requiring a borrower to refrain from granting further security, (II) disposal covenants, restricting disposals of assets or key assets outside the normal course of business, (III) restrictions on mergers, reorganisations or restructurings and (IV) restrictions on any change of business or substantial change of business.
- There are a variety of covenants which may be impacted by a borrower who is adapting its business in light of COVID-19 concerns, for example, if the borrower’s plan is to divest of certain key assets this may trigger the disposals covenant.Similarly, if a borrower involved in manufacturing or production has plans to move into new products or markets, then change of business covenants may be triggered.
- Again in many cases a breach may result in a default under the loan.
- These are statements of fact made in a loan agreement by a borrower which, if incorrect, may amount to a misrepresentation under the facility agreement entitling a lender to terminate the facility.
- Often representations are included in relation to (I) the factual correctness of information supplied by the borrower or (II) no litigation pending or threatened against the borrower.
- If a borrower becomes aware of any representation which may no longer be accurate it should take advice as to whether the information needs to be disclosed to the Lender.
- Events of Default
- As the name suggestions these are events which result in a default under a loan agreement and generally, subject to cure and grace periods, allow a lender to call for repayment of a loan.
- As discussed above, breach of covenants and undertakings, as well as misrepresentations, will generally be events of default, which if triggered may render a loan immediately repayable.
- Other common, events of default include (I) non-payment of amounts when due by a borrower, (II) cross-default i.e. a breach of other facilities (for example with another lender), (III) cessation of business and (IV) certain insolvency events and creditors processes.
3. Seek appropriate advice and contact your lender regarding waivers. If a borrower considers that it may be in breach of the terms of a loan it would be prudent for a borrower to consider taking advice before approaching the lender and thereafter possibly seeking a waiver or standstill agreement. These can take different forms and can apply a single one-off breach of an existing facility or apply to multiple-breaches for an interim period of time.
4. Remain alert to cross-default. Consider cross-default clauses carefully, a borrower should firstly locate these provisions in their loan agreement and proceed to some key questions:
- Do you have multiple facilities in place, for example senior funding, mezzanine funding, private equity funding and/or junior funding?
- Will a breach under one facility trigger breaches and notification requirements on the others?
- Are there now breaches which can be identified?
5. Carefully consider security provided. A borrower should be aware of their security position and again address some key points:
- Identify all key assets and security applying to those assets.
- Determine whether existing debentures are in place.
- Determine whether fixed charges apply to particular key assets.
- Determine whether there are any security free assets that may be offered as additional collateral if required.
6. Consider new finance options. If cashflows are an immediate concern, consider new methods of obtaining finance, which may include:
- New forms of finance from existing lenders, e.g. asset finance or invoice discounting.
- Available funding from new lenders, noting that existing lender consent may be required.
- Funding available via existing lenders which is “backed” new government initiatives, for example, (I) the British Business Bank’s Coronavirus Business Interruption Loan Scheme (CBILS), for SMEs or (II) the Bank of England’s Covid Corporate Financing Facility (CCFF) for larger companies.
In the case of new facilities check first whether this will be permitted under existing facility terms.
Please see our website for further details and commentary in connection with the CBILS and CCFF.
For further information please contact the Carson McDowell Banking team.
*This information is accurate as at 2 April 2020
*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.