Following the outbreak of the coronavirus disease (Covid-19) pandemic, all areas of business are now affected by its devastating effects. In particular, businesses will now be looking closely at their banking and debt finance arrangements. Specific areas of focus will include:
We set out below 10 areas for lenders and borrowers to think about in these difficult times.
Due to deteriorating cashflows, some borrowers may need to approach their lenders to defer scheduled payments under the financing agreement or perhaps seek a broader rescheduling of debts. Borrowers should check that the necessary funds will be available for making interest and fee payments, and scheduled repayments of principal, over the next few months and that there is no risk of a payment default. Speak to your finance providers – often, they will be far more sympathetic if they are involved from the start. Any quid pro quo for such concessions however, for example personal guarantees, (see here), should be considered carefully.
Businesses can also consider taking out new finance. The UK government has announced the creation of several schemes, including:
2. Preserve cash
Borrowers will need to consider all options to manage their cashflow. A borrower may be able to generate cash, for example, by:
(a) Reducing or delaying expenditure
(b) Minimising prepayments: a borrower could also save cash by not making any planned voluntary prepayments
(c) A sale of assets: any disposal of assets during the term of a loan will typically be subject to restrictions which the borrower will need to check carefully; and
(d) Debt buy-backs: since the crisis has resulted in lower debt trading prices, the loan agreement could permit a borrower to cancel debt at less than par and thereby reduce interest costs.
3. Review funding requirements
If borrowers have on-going funding requirements and have committed facilities that are not fully drawn, they will need to check whether all conditions precedent to utilisation can be met. If further additional amounts are required, they may need to seek new funding. This might include shareholder loans or funding under one of the government initiatives (see above). One important caveat is that borrowers will need to ensure that any new financing does not breach existing arrangements.
4. Review existing facility agreements
Borrowers should review their existing facility agreements to ensure they can continue to comply with their ongoing obligations and that an event of default will not arise, in particular:
(a) Covenants Breaches of covenants usually allow lenders to declare a default under loan documents and demand early repayment of loans and/or act as a draw-stop, so that borrowers will not have access to their facilities. As a result, if you are facing a potential breach as a result of Covid-19, you must consider further steps on a timely basis to determine whether you can or should draw on existing available debt commitments (and lenders will pay closer attention as to whether the conditions to borrowing have been satisfied), or whether it would be prudent to proactively seek waivers in advance.
Key points to consider include:
(b) Asset based lending: If Covid-19 adversely impacts supply chains, manufacturing and the revenues of businesses for a significant period of time, this could negatively impact the available “borrowing base” for businesses reliant on asset based liquidity facilities as the value of such businesses’ inventory and receivables decline. In addition, as excess availability under these facilities declines, borrowers may be faced with increased reporting obligations, more stringent limitations on their cash management and required compliance with additional financial covenants.
(c) Information undertakings Borrowers should review their reporting and notification obligations to lenders and any deadlines by which they are obliged to deliver any such information and notices. Even where a grace period applies, a notice may still be required. Information undertakings usually include:
Information requirements may also include a catch-all for information requested by the lenders.
(d) Representations and warranties Borrower and lenders should review customary representations and warranties in their loan documents in the context of Covid-19, including the following:
In more normal times, if you fail to pay under a loan agreement you may expect to receive an enforcement/acceleration notice from the lender. These are, however, far from normal times. The UK’s court system has not shut down, but it has been scaled back with more reliance on video call technology. It will be a lot harder for creditors to bring/enforce proceedings during the crisis. It is also being reported that the government is considering a moratorium on the issuing of petitions to assist struggling businesses in the face of the impact of Coronavirus. Those contemplating issuing a petition should do so promptly to avoid the risk of a moratorium being introduced.
Lenders and borrowers should consider the following customary events of default may be relevant in the context of the Covid-19 outbreak. The extent to which the impact of Covid-19 might give rise to an event of default will depend on the description of such events in the relevant loan documentation and any applicable grace periods):
Lenders and borrowers should make arrangements for key business decisions requiring board and/or shareholder consent to be made virtually. In the case of board meetings, most companies’ articles of association allow for virtual meetings and most boards will be familiar with the process of holding meetings by telephone or videoconference, but it is especially important in the current environment (where directors may be using new technology for the first time or stranded in different time zones) that the process set out in the articles for virtual meetings is followed.
Borrowers should make early contact with lenders, especially where waivers or amendments may be required. Borrowers should be proactive and keep lines of communication open at all times.
7. Drawdown under existing facilities
(a) Revolving facilities Borrowers may be able to draw under existing revolving facilities in order to (i) have sufficient funds to meet payment obligations and/or (ii) borrow now when the organisation is able to satisfy all relevant conditions to the drawdown, rather than at a later date when there might be a potential or actual event of default that could act as a drawstop.
(b) Term facilities If a borrower has committed to a transaction (for example, the acquisition of a property or a company) but there is a gap between exchange and completion, it will need to check that it is still able to fulfil the conditions precedent to drawdown of facilities required to complete that transaction. Other finance arrangements may provide that drawdowns under term facilities will occur throughout the life of the arrangement (for example, finance for developing a property). The borrower should check whether it will still be able to fulfil the conditions precedent to each further drawdown or whether it needs to approach the lender to seek to renegotiate these conditions precedent.
8. Registering security at Companies House
If a lender requires new security to be granted (for example, in connection with new monies being advanced to a borrower), that security will need to be registered at Companies House. A form MR01 in respect of the relevant charge or mortgage (together with a certified copy of the charging instrument and the registration fee) must be delivered to the Registrar of Companies before the end of the period allowed for delivery. The period allowed for delivery is 21 days beginning with the day after the date of creation of the charge or mortgage.
This period of 21 days remains the case despite the Covid-19 lockdown. Companies House has no power to waive the 21-day filing rule.
Given the practical challenges raised by the lockdown, it is even more important than usual for anyone needing to register security at Companies House to plan how that security will be registered. Ideally, plans for registration of any such security should be put in place before the security is created.
Charges can be registered at Companies House either by using a paper form or online using the Companies House Web Filing service or using software filing. During the lockdown it may be best to file charge and mortgage registration forms online.
9. Force majeure, frustration and illegality
It is not common for facility agreements to contain force majeure clauses but they are sometimes a feature in some derivatives documents. However, force majeure clauses may be used in the documents relating to the transaction being financed (for example, in project finance or real estate development finance transactions). The specific details of any clause must be checked to see if the Covid-19 pandemic would trigger it.
Frustration and illegality may also be relevant in relation to the underlying transaction documents, although currently it would seem unlikely that a borrower could rely on these concepts in relation to its own obligations under a facility agreement.
This is a fast-moving situation and the government is introducing new measures at a blistering pace. Keep abreast of developments by regularly reading specialist news articles by business, accounting and legal experts. Fox Williams provides articles on the latest Covid-19 developments here.
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.
Articles and commentary by our legal experts on the impact of Covid-19 are all available here.
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