COVID-19: Impact on Finance Arrangements

With the recent dramatic changes in the economy as a result of COVID-19, it is prudent for both borrowers and lenders to assess the implications of COVID-19 for loan documents and their financing arrangements. 

In the current climate of uncertainty, communication between borrowers, lenders and their respective advisors is more vital than ever in order to pre-empt breaches of terms in loan documents and/or cash flow issues. 

Now that the first interest payment date for this year for many loans has passed, the most immediate issue for lenders will be missed or reduced scheduled payments. However, it is likely that COVID- 19 will also have an impact on other terms of loan documents, so that lenders, borrowers and their advisors will need to work together to agree viable solutions which are achievable in the short-term. 

Most loan documents already contain information undertakings with which borrowers will need to comply and which give lenders the right to ask for information. Lenders should request borrowers to prepare revised financial projections in order to analyse what types of restructuring options and actions are required over the coming months. Lenders, borrowers and their advisors will also have to diligence the existing loan documents since it is likely that certain terms of the loan documents will need to be amended and/or waived in the short-term to adapt to the evolving economic impact of COVID-19 on businesses.   

Examples of amendments to the terms of the loan documents and/or waivers which could be considered as short-term options are:   

• Waiver of specific breaches of the terms (provided that all other rights are reserved); 
• Extension of grace periods for breaches of terms; 
• Resetting financial covenants;
• Extension of the time for repayment of interest for a limited period; 
• Forbearance for a limited period of interest payments and scheduled amortisations;
• Resetting of financial covenants and how these are calculated;
• Switching to PIK interest (if there are term loan commitments);
• Mandatory prepayment holidays;
• Draw-stop provisions (which would stop the borrower from drawing undrawn commitments, for example, where there is a default or the repeating representations are incorrect);        
• Equity cure provisions and the limits on the number of cures that can be applied (where the borrower has a sponsor/shareholder which has the means to inject equity or subordinated debt into the borrower);   
• Extension of time for delivery of information or amending information undertakings where, for example, there could be a qualification by auditors in the accounts or due to practical constraints, auditors may not complete their audits on time;  
• New permissions or consents, for example, where changes to the business are necessary for the business to adapt to the new economic climate or where the borrower will need to incur additional financial indebtedness (and inter-creditor/subordination  arrangements will also have to be considered); 
• Reviewing whether repeated representations remain true, for example, in relation to financial statements, or that no default has occurred and amending these where appropriate; and 
• Reviewing events of default which could be triggered, for example, non-payment, the material adverse effect provisions, insolvency issues, misrepresentations, and amending these where appropriate.    

Since the immediate concern for borrowers will be cash flow difficulties, it is likely that borrowers will also request lenders to provide additional facilities to manage cash flow. These new facilities can be documented as part of an amendment, or an amendment and restatement of the existing facility agreement and can take a number of different forms, for example, revolving credit facilities, accordion/incremental facilities, overdraft facilities etc. In considering the risks, lenders will need to assess, for example, the ability of the borrower to make repayments and to meet financial covenants (with the increased debt), whether reporting obligations need to be altered, the viability of the business of the borrower and the protective measures currently being taken by the borrower, whether the existing security package is sufficient to secure the increased debt and the pricing implications for the increased risk.

Now more than ever, there will need to be collaboration between lenders, borrowers and advisors in order to produce flexible, creative and commercial solutions to deal with the impact of COVID-19 on financing arrangements and businesses. 

Should you need any assistance with financial restructuring options or new financing arrangements, please contact Mark Kavanagh, Triona Ryan or any member of the ByrneWallace Banking & Finance and Insolvency and Restructuring Teams.   

Please note that the content of this summary does not amount to professional advice. Legal and tax advice should be sought in respect of specific queries. The Covid-19 situation is evolving rapidly and this update is provided on the basis of information available as at 6 April 2020.