There is no telling how long, and to what extent, the impact of the COVID-19 pandemic will have on the financing industry. In considering each of the following factors, whether from a lender’s perspective or borrower’s perspective, we suggest planning for an extended period of business interruption.
Set out below are some of the key considerations that lenders may want to incorporate into their assessment of existing credit relationships, as well as future ones. This is a non-exhaustive list and an in-depth risk analysis should be undertaken where appropriate.
• Stay in tune with rapidly-evolving regulatory changes and how these changes might affect internal policies that guide decision-making for each lending transaction.
• Conduct a risk assessment of each portfolio and determine the level of forbearance you are prepared to offer for defaulting borrowers (if any), whether those defaults are due to incompliance with requirements, breaches of covenants or late payments.
• If applicable, review the credit facility’s drawdown conditions and determine how these conditions may affect the term of the loan.
• Diarize action dates for any enforcement clauses under your security agreements to ensure your rights are not unintentionally waived due to a lapse in enforcement.
• Consider whether the interest rate definitions for future credit facilities will have to be redefined in order to adapt to changing reference rates.
Set out below are some of the key factors that borrowers may want to consider in assessing their existing credit facilities, as well as any future loans and credit facilities from institutional lenders.
• Review your credit agreement for any reporting requirements, covenant compliance, and payment schedules in order to determine which of these negotiated terms you may be offside, whether currently or in the near future.
• Assess the risks of being offside on your requirements, covenants, and schedules under the terms of your security agreement.
• Speak to your lending institution about how recent circumstances have affected your ability to comply with such requirements, covenants, and schedules in order to make alternate arrangements under your credit facility. Maintain open and frank dialogue with your lending institution.
• Consider what, if any, actions your organization/business has taken in light of current circumstances (i.e. operationally, structurally, or financially).
o Do such actions inadvertently trigger mandatory prepayment terms under your security agreement?
o Do such actions constitute a material adverse effect, material adverse change, or force majeure?
In connection with the foregoing, we suggest that both borrowers and lenders review all material agreements to which they are a party to determine their respective rights and obligations and, more specifically, how these rights and obligations may be affected by the current economic environment. Particular attention should be paid to the following elements of any agreement:
• What constitutes an “event of default” and is there a cure period during which a party may remedy an event of default without further consequence?
• If notice is required to be given pursuant to the agreement (e.g. notice of an event of default), how is notice to be delivered (i.e. registered mail, fax, personal service, electronic mail)? When is notice to be delivered and to whom?
• Is there a “material change” clause which relieves a party of all or certain of its obligations in the event of a material change? “Material Change” will most likely be a defined terms that sets out the thresholds for what constitutes a material change. In some cases, a material change clause will permit a party to terminate the agreement because of the occurrence of a material change. Such clause may sometimes be referred to as “material adverse change” or “material adverse effect” clause.
• Is there a force majeure clause in the agreement that outlines circumstances in which either party or both parties to the agreement will not be held liable for their inability to fulfill their obligations for reasons outside of either party’s control? A force majeure event will also be a defined term that typically references natural disasters, government shutdowns and “acts of God”. If not already contemplated, force majeure definitions should include reference to medical emergencies, including pandemics.
• What termination rights do the parties have, if any? Are there financial penalties applicable to termination? Can the agreement be terminated upon providing notice?
We note that all agreements should be reviewed in their totality as the aforementioned content may be affected by other contractual obligations.
Please do not hesitate to contact your relationship partner or lawyer if you have any questions or if we can be of assistance in guiding you through these new challenges.
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This article represents general information and is not legal advice. Please contact us if you would like legal advice that is tailored to your particular circumstances. We would be happy to help.