The financial impact of COVID-19 on businesses cannot be ignored or under-estimated. However, there are steps which you can take to help sustain, maintain or even progress your business in these uncertain times.
It is likely that a large number of Borrowers in this pandemic will be at risk of a breach of provisions in existing Facility Agreements and security documentation. It would be prudent to look at your business and current borrowings in the context of the provisions of your existing Facility Agreements and security documentation (we cover this in more detail in our article, Coronavirus: establish your position in the UK by reviewing your Facility Agreements) and assess the likelihood of this in advance of an actual default occurring. This will allow you sufficient time to start a dialogue with your Lender regarding an amendment and/or waiver.
Putting an amendment or waiver in place prior to the breach will also avoid any risks of cross-defaults in any other finance/security documents and avoid any risk of the Lender beginning any enforcement proceedings against you.
Please do bear the following in mind when speaking to your Lender:
- Give context around any request, i.e. the effect of the pandemic on your business and any financial information you have to support this; and
- Your strategy plan for the business going forwards and how you are adapting to the current climate (e.g. a restaurant may increase its takeaway capability or a retail business may move towards online orders)
Further, we would also suggest that you consider exhausting the following options:
- VAT – have you deferred your payment?
- Have you accessed all government schemes applicable to you?
- Have you asked your landlord for a rent reduction?
- Are you maximising your working capital?
- Have you asked for payment holidays on your tax bill?
It is advisable to work through all of the above steps prior to liaising with the Lender.
So, what are your options?
Amendment to Facility Agreement
When the vast majority of Facility Agreements were agreed, the COVID-19 pandemic had not been predicted. Subsequently, it may be appropriate that the terms of the Facility Agreement will need to be revisited and it will typically fall on you to make such a request.
Following a review of your Facility Agreement, you will be able to summarise the provisions of the document which require amendment and can seek agreement from the Lender to these changes. If and when a Lender agrees to a change, this will be documented as an amendment to the Facility Agreement.
Note that a Borrower will typically bear the costs and expenses involved with amending a Facility Agreement (including the Lender's legal costs).
Other areas to consider when amending a Facility Agreement include:
- Security – are any changes required to security documents? (For instance, as part of your business continuity plan, do you anticipate disposing of any assets which are currently subject to security?)
- Guarantees – is your loan guaranteed by anyone? If so, will the amendments to the Facility Agreement change the nature of their obligations?
Will the guarantors' consent be required?
Where a Borrower is in breach of a provision within a Facility Agreement, and such breach may constitute an Event of Default, the Lender may agree to waive that Event of Default. Usually this will be a waiver for a specific time period, i.e. a particular financial reporting deadline or for a specific period of time. Once this period of time has ended, you will need to be compliant with the waived provision.
Please note that under the relevant Facility Agreement, you will likely need to comply precisely with any notice provision. This may include written notice to a particular address by a specified method of service. It is important to ensure that you comply with this.
Logistics of execution
The chief challenge arising from the pandemic is the logistics of execution around documents which arise from offices closures and the vast majority of the population now working from home.
A number of Lenders execute documents in hard copy which may present a challenge in these times. You will need to liaise with your Lender to confirm their ability to execute any amendment and/or waiver requests.
We wish you safe passage through these uncertain times. As ever, 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.