How could the Covid-19 crisis affect your loan arrangements?

Things are moving very quickly, and it is difficult to predict what will happen, but we would advise you to consider the following potential issues sooner rather than later.

Financial covenants: if there either has been or could be a drop in income, then this could affect any interest cover covenant in your loan agreements.  This is often reported quarterly and so may not be reported until the next quarter-end of 30 June. However, please see below the ‘No Default’ representation. Knowing that you are very likely to breach a financial covenant could be a Potential Event of Default.

Events of Default:  the following events may be triggered over the next three months:

• Breach of financial covenants – non-compliance with any financial covenants will be an event of default without any grace period;
• Auditors’ qualification – will they have to make a material qualification to your accounts or make a material qualification to the audited accounts of any other member of your group;
• Cross-default, insolvency-related events or cessation of business – if your events of default extend to other members of your group and they are in financial difficulty, could their situation cause an event of default?
• Material Adverse Change – could this crisis and any related cashflow issues be “any event or circumstance or series of events or circumstances” that “has or could reasonably be expected to have a Material Adverse Effect”?

Representations: when you are requesting a loan or at the time of making any loan, on the first day of each interest period, and on each day a finance document is entered into, the borrower has to repeat certain representations to the lender.  These include:

• No Default – no event of default [or potential event of default] has occurred and is continuing or would result from the making of any loan;
• Accounts – save as previously disclosed in writing to the lender there has been no material adverse change in its financial condition since the date to which those accounts were drawn up.

Drawdown of loans and representations:  As mentioned above, it is usual that you will have to repeat most if not all the representations before you can drawdown a loan.  If there has been an actual event of default or a potential event of default, then the lender can refuse your request to drawdown any loan. Potential Event of Default generally means an event or circumstance that, with the giving of notice, the expiry of a grace period, the making of any determination under the finance documents or the fulfilment of any other applicable condition (or any combination of the foregoing), would constitute an event of default.

Information covenants: Most loan agreements require you to notify the lender of any event of default or potential event of default promptly upon it becoming aware of its occurrence.

Recommendations: Stress test your cashflows, check your loan arrangements, and if there are any concerns be open and transparent with your lenders.  If a waiver is needed, request it as soon as possible.

If you would like to discuss any issues raised in this ebriefing, please contact Natalie Singh.

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