COVID-19: Loan Agreements and Commercial Financing

Author: todd-strang posted in: Corporate Commercial + COVID-19

The COVID-19 pandemic has created legal implications for borrowers and lenders subject to existing loan agreements. Borrowers are trying to mitigate risks to their businesses and face the daunting challenge of managing their cash flow against their legal obligations. On the other hand, lenders face the challenge of working with borrowers in a manner that allows them to provide some level of accommodation while protecting their legal rights and the value of their security.

Issues Related to Existing Loans

The legal issues faced by borrowers and lenders will be fact-specific to each lending arrangement. The impacts of COVID-19 on a lending arrangement will be affected by the definitions, terms, conditions, representations and warranties, and choice of language used and contained in the loan documentation agreed to by the parties.

Some pertinent issues of concern for borrowers and lenders arising from the pandemic include:

• What is the impact of the COVID-19 pandemic on the definition of EBITDA?
  • Does this impact the borrower’s reporting requirements to the lender?
  • What are the risks of default associated with a reduction in EBITDA?
• Is COVID-19 a Material Adverse Effect (MAE) or a Material Adverse Change (MAC) as defined in the loan documentation, and if so, does this constitute a default?
• Are their conditions precedent to draw-downs on existing facilities that require no MAC? Do such conditions precedent impact the ability of a borrower to operate its business as a going concern?
• What representations and warranties in existing loan documentation are potentially breached as a result of the effects of COVID-19? Some examples of potential breaches include:
  • No MAE/MAC
  • No Default
  • Accuracy of financial information
  • Solvency
• Are borrowers required to give notice of loss to their insurers to remain onside of covenants (e.g., under business interruption policies)
• Is the borrower in breach of financial covenants? Consider how long the breach is likely to continue. Examples of breaches of financial covenants include:
  • Fixed Charge Coverage Ratio
  • Current Asset to Current Liability Ratio
  • Leveraged rations
  • EBITDA
• Consider what constitutes a default under the loan agreements:
  • Failure to make payments
  • Breach of financial covenants
  • Breach of representations and warranties
  • Material adverse change
  • Insolvency
  • Cross defaults

If a borrower is in default, it is important that a borrower promptly seeks legal advice and attempts to find a solution that allows the business to operate in a viable manner. Depending on circumstances, you might reach a resolution that satisfies both the lender and the borrower. When successfully negotiated, these solutions allow the lender to maintain its priority and security without taking enforcement steps against the borrower and provides the borrower with an arrangement to continue operating its business as a going concern.

Legal and Commercial Developments with Respect to COVID-19

Our team is following legal and commercial developments with respect to COVID-19. We are here to assist with providing practical and up to date advice during this period of uncertainty. If you have any questions related to your business, please call our office at 780-532-7771 to discuss a consultation. Our corporate commercial practice group has a wealth of knowledge and skill in all areas of the business life cycle.