Coronavirus has already damaged large swathes of businesses across the world. We recommend that all businesses should review their current financing arrangements. This is to ensure that businesses are ready to deal with any issues they might encounter in the current and expected economic circumstances, review the potential impact of those issues on future plans, and work out what can be done about it.
For most loans, the pandemic itself won’t constitute a breach of their terms or the terms of any related finance documents. However, the indirect impact on businesses’ financial performance and operations (and potentially on the wider economy) may result in borrowers falling foul of certain provisions.
Obvious breaches like non-payment, failing financial covenants or insolvency will constitute a default under standard loan documentation. However, there are lesser-known provisions which can also result in defaults. These relate to:
- events or circumstances giving rise to a material adverse effect / material adverse change;
- any attempt by the borrower to reschedule indebtedness with any of its creditors (possibly including the lender);
- cross defaults under the terms of any agreements between the borrower and third parties;
- debt undertakings (in particular, restrictions on the borrower incurring financial indebtedness to third parties);
- negative pledges prohibiting the borrower from granting other security in favour of third parties; and
- intercreditor arrangements governing the inter-relationship between the rights of multiple lenders.
Download our publication Taking stock: key considerations around the impact of COVID-19 on existing loan arrangements, which looks at the issues facing borrowers, the potential effects of COVID-19 on existing loan arrangements, and some pitfalls to avoid.
Our banking & finance experts can advise on the terms of your existing loan arrangements, and assist you with any measures required to see your business through these difficult times.
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