The coronavirus (COVID-19) has undoubtedly introduced uncertainty across the globe for many businesses. But there are ways you can create more stability during this unprecedented period by assessing its impact on your existing borrowing position and the circumstances in which such debt facilities could be terminated.
In this insight article, we outline some provisions common in Facility Agreements, which you may wish to review in order to understand the possible impact of coronavirus on your loan facilities.
- If you have not fully drawn down your facility, check the funding conditions set out within the Facility Agreement. Usually further loans can only be drawn if no default is continuing or likely to occur as a result of the drawdown and the repeating representations are true in all material respects. Where the facility has a specific purpose, there may be conditions, which are specific to that purpose. For example, with a development finance Facility Agreement, do check if there are any restrictions on drawdowns if there are cost overruns or missed project milestones.
- We understand that a number of you may wish to draw down undisbursed facilities as soon as possible to maximise flexibility and to ensure that you have access to cash during this uncertain period. However please do consider the additional interest cost of doing so and also whether this is the best decision for your business. It may be that a conversation with your Lender to delay any repayments / waive breaches for a period of say 3 months may be a more beneficial and pragmatic solution.
- Sometimes a Lender will require the cash drawings under a revolving working capital facility to reduce to £0 for a set period of days each year. Please note it may be advantageous to settle this requirement as soon as possible to maximise the time period until the next 'clean-down'.
Representations and warranties
- The vast majority of Facility Agreements require you (the Borrower) to give a number of representations and warranties on the date of the Facility Agreement and also to repeat these on each subsequent day or at regular intervals such as an interest payment day. Are you still able to correctly give each representation on the repeat date? If not, you may be in breach of the Facility Agreement, which will likely cause a default.
- Material Adverse Change ('MAC') – has there been a material adverse change in the Borrower's assets, business or financial condition? You will need to look closely at the definition of MAC to see if the circumstances described apply to your situation. We cover MAC in further detail below.
- Financial covenants are common in a Facility Agreement and should be monitored closely. Can you continue to comply with these covenants?
- Please do review your reporting requirement under the Facility Agreement and ensure that you are able to meet these deadlines. For instance, those with a 31 December financial year end will be required to deliver the annual audited financial statements soon.
- Keep in mind that there is usually an obligation in a Facility Agreement requiring the Borrower to notify the Lender of any default and what steps you are taking to address such default.
- Many Facility Agreements also include an obligation to provide any information in relation to your financial condition, business and operations o as the Lenders may reasonably request. Your Lender may be in touch in this regard.
- Ensure you have a constant dialogue with your Lender if you are unsure about your ability to meet a deadline and when communicating with your Lender, ensure that you present a plan/solution setting out when you can meet the requirements.
Events of default
Common default triggers in a Facility Agreement are non-payment, breach of financial covenants and other covenants, misrepresentation, insolvency and insolvency proceedings.
Cessation of business is common for many of you in the current climate, with the hospitality and food industries particularly affected. This may, unfortunately, also trigger a default under your Facility Agreement (of which you are contractually obliged to notify the Lender).
Material Adverse Change ('MAC')
- There is wide speculation of whether the COVID-19 pandemic constitutes a MAC. This will depend on the wording of the clause in your Facility Agreement. However, the standard market position is that the hurdle for calling a MAC clause is high. A Lender will be mindful of this, especially in the current economic climate.
The above points are not intended to be exhaustive, as Facility Agreements can be very transaction specific and Lenders have their own form of template Facility Agreement. Please ensure to carefully review the provisions of your actual Facility Agreements.
If there are concerns, following the review of your Facility Agreement, we would encourage you to proactively engage in dialogue with your Lender to find potential solutions which may help sustain, maintain or even progress your business in these uncertain times.
We are here to help and if you have any questions or would like further advice on the above please contact a member of our banking and finance team.