COVID-19: Market Developments in Banking and Finance

March 30, 2020

It may be too early to say exactly how the COVID-19 pandemic will ultimately impact borrowers’ financial health and liquidity needs, or how those needs will be addressed by lenders and borrowers over the long term. However, at least in the short term, both lenders and borrowers appear to be willing and able to act swiftly to address the specific and immediate liquidity issues that borrowers are facing as they attempt to honour their pre-pandemic commitments.   

A variety of measures appear to be under consideration or in the process of implementation, including (among others) measures to provide needed liquidity and adjustments to specific covenants to ensure borrowers maintain access to credit facilities without triggering defaults requiring further waivers or consents.

To the extent borrowers are facing a liquidity or potential liquidity crisis as a result of the pandemic, some of the solutions and measures that may be considered and/or implemented include the following (in no particular order).

Deferral of Amortization Payments

For borrowers with term loans with regularly scheduled amortization payments that have already experienced or expect to experience a material drop in revenues due to the pandemic, lenders may be approached for waivers so that such amortization payments that are otherwise due and payable in the short term (for example, on March 31 and June 30) are being deferred until the maturity date.

Recasting of Financial Covenants

Also for borrowers who have experienced or expect to experience a material drop in revenues, lenders may be approached to “recast” the financial covenants in the credit agreement (due to the impacts on “EBITDA” of the COVID-19 pandemic) from traditional “Leverage Ratio”, “Fixed Charge Coverage Ratio” and/or “Interest Coverage Ratio” covenants (which would correspondingly be suspended for a short number of fiscal months/quarters), to “Minimum Liquidity” and “Minimum EBITDA” covenants which would be tested on a monthly/quarterly basis from the current fiscal month/quarter and on a go-forward basis in the near term number of months/quarters.

The “Leverage Ratio”,  “Fixed Charge Coverage Ratio” and/or “Interest Coverage Ratio” covenants would then be reinstated after that limited period of time, thus hopefully obviating the need for such borrowers to ask for repeated waivers and/or amendments in the near term while simultaneously maintaining access to their credit facilities (assuming no other defaults existed).

Accessing Accordion Facilities

For borrowers looking to increase their access to potential capital under their existing revolving and/or term facilities that already contemplate “accordion facilities”, lenders may be requested to increase their commitments by having such accordion facilities “pulled down” and made available, potentially on accelerated timeframes than those provided for under the applicable credit agreements.

Close attention needs to be paid to the terms and conditions on which the accordion facilities can be made available under the credit agreement without the need for further lender approvals being required (beyond just approving the increase in their own respective commitments). For example, in many cases, “required lender” or “unanimous lender” consent is not required under the terms of the credit agreements to access these accordion facilities, obviating the need for additional layers of lender approval from any lenders unwilling to increase their commitments.

Supplemental Facilities Funded Alongside Equity Injections

Where borrowers are “portfolio companies” of private equity sponsors, lenders may be approached by sponsors to consider requests to make available supplemental credit facilities under existing credit agreements. Potential “quid pro quo” from lenders may include commitments of sponsors to make “equity injections” into the business to demonstrate their continued commitment to the capitalization and financial health of the borrower.  Requests for such increased facilities may come with related requests from sponsors such as short-term financial covenant recasting (as discussed above), foreseeable future interest payments becoming “payment in kind” and for the upfront fees otherwise owing to the lenders for the provision of such supplemental facilities to be “payment in kind” to help facilitate liquidity. In return, lenders may seek supplemental provisions from such borrowers such as 13-week cash flow reporting, “anti-cash hoarding” covenants, and/or further tightening of permitted distribution, permitted disposition, permitted acquisition and permitted investment negative covenants.

Leveraged Financings                                            

For borrowers who had entered into binding purchase agreements with sellers to purchase businesses without the benefit of “financing outs” (and had entered into a corresponding customary commitment letter with lenders accordingly at the time of signing the purchase agreement), we are aware of lenders continuing to honour such financing commitments and for such transactions being consummated in this COVID-19 environment.

Flex provisions

Customary sophisticated acquisition financing commitment letters (particularly those with private equity sponsor buyers) would not normally contain a “no material adverse effect” condition precedent separate and apart from the one contained in the purchase agreement itself, thus providing lenders with limited opportunity to refuse to fund the acquisition if all other customary conditions precedent contained in the commitment letter were satisfied. However, it would not be uncommon for such financing commitments to include a “flex provision”, allowing lenders to modify certain of the terms of the proposed financing (including pricing) as they may require in order to consummate the financing and to be able to successfully syndicate the financing thereafter. Purchasers involved in leveraged finance transactions being consummated in the current environment may see more exercising of these “flex provisions” by their lenders, and should ensure they expect to able to meet their obligations under their new credit agreements going forward, as so modified by the exercise of the “flex”.

Going Forward

As the impact of the COVID-19 pandemic continues to evolve, and as and when borrowers become better positioned to forecast earnings and other financial metrics, we expect further evolutions of potential borrower and lender responses and activity to address liquidity and potential liquidity issues of borrowers that may arise. In the meantime, we are seeing a variety of ways in which borrowers and lenders are managing to navigate the uncertain COVID-19 environment.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at

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