Coronavirus (COVID-19): Implications for Commercial Lenders and Borrowers

The economic disruption will affect many contractual arrangements including lending, funding, banking and security documents and contracts.  In this note, we make some practical suggestions for lenders and borrowers.

If you are a lender or a borrower, you should be;

• Examining the events of default clause in your agreements. If you are a borrower you need to know if you are (or are about to) cause an event of default; if you are a lender you should be considering the likelihood of your borrower causing an event of default and whether that may lead to termination rights. Typical event of default clauses which could be triggered in the current climate include;
  • Failing to pay any sum when due;
  • The borrower becoming unable to pay its debts when due;
  • The value of the borrower’s liabilities exceeding its assets;
  • Cessation of business (although consider whether this would capture a temporary cessation which is mandated by law);
  • Default under any other lending; and
  • Breach of financial covenants.
• Examining any applicable covenants. These are often based on calculations of income, earnings or EBITDA. Is forecasting, particularly cash flow, up to date and do the forecasts provide for the likely economic down turn? Stress test everything on a variety of scenarios; good, bad and worse if you are a borrower.
• Checking information / audit requirements. Often finance agreements call for the provision to Lenders within 30/60/90 days of financial year end statutory accounts or even audit reports. Will a borrower be able to comply at the current time, can the audit even be completed if auditors can not visit the borrower’s premises?
• Checking interest rates if you have an interest rate which tracks Bank of England base rate or LIBOR but noting these are usually subject to a “floor” when rates drop to near zero as they have done currently. Check also penalty rates which apply when the borrower is in default.
• Checking the force majeure or material adverse change clauses which may or may not permit delayed payments in the event of circumstances which are outside the control of lender or borrower – note however certain force majeure or material adverse change clauses can specifically include or exclude pandemics so this needs a careful eye. If in doubt, take advice.

Whether you are a lender or a borrower, dialogue and discussion is the key to seeking to resolve any issues which have arisen as a result of Covid-19 under any finance document. Things to consider on any renegotiation of facilities;

• Interest or capital holidays or deferments. Holidays are obviously preferable but also probably unlikely with a commercial lender. Remember to cash flow forecast the implications of any deferment to avoid storing up a problem in a few months time.
• Rolled up interest.
• Review interest rates generally.
• Security portfolio. Can a borrower offer any further security for further borrowings? Most borrowers will want to avoid personal guarantees where possible but where those have to be given make them time limited so that they terminate when the additional borrowings are repaid.

Note any revised terms should be properly documented so that there is no confusion or disagreement between the parties in the future.

*The information set out in this article is correct at the date of publication (01 April, 2020). The effect of coronavirus on businesses is a fast-changing area and so it is important to obtain legal advice to ensure you are properly protected.

Contact us

If you have any questions regarding the commercial impact of the Coronavirus upon you or your business or are seeking up-to-date legal advice, contact Nick Davies on 01202 294 566 or email [email protected].