As the Government moves into the delay phase in response to the ongoing coronavirus outbreak, what should lenders and borrowers be focusing on when negotiating new credit facilities?
The delay phase will involve encouraged home-working, school closures and restrictions on large gatherings, all of which could impact on borrowers' businesses. Lenders will be expected by their regulators to treat COVID-19 effects on borrowers responsibly. Both lenders and borrowers alike should be focusing on, and where appropriate having discussions around, the following credit agreement issues:
- financial covenants: careful attention needs to be paid to financial covenants which the borrower is to give, particularly profit- and cashflow-based covenants, which could be impacted by the economic effects of COVID-19 in the short- to mid-term.
- headroom: the parties might consider providing for financial covenant headroom for a limited period to help the borrower through the expected high impact period of COVID-19.
- waivers: discussion and drafting around future waiver requests to address the specific impact of COVID-19 on the borrower's business for a limited period might be included in the credit agreement or by side letter.
- repayments: the borrower's ability to make repayments should be subject to additional stress testing, reflecting the possibility of reduced cashflow in the expected COVID-19 impact period, and the knock-on effects this would have on triggering one or more events of default should be tracked through.
- material adverse change: consideration could be given to drafting an exclusion for the effects of COVID-19.
While the extent of the financial impact of COVID-19 is uncertain, an active dialogue on the above points can anticipate and address specific issues and facilitate a successful long term lender-borrower relationship.
Contributor
Lindsay Lee
Senior Associate
