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What To Expect in the Days to Come – Top Lender Issues re COVID-19

March 23, 2020

  1. MAE—Many Lenders have asked us whether the consequences of Covid-19 constitute a Material Adverse Effect for purposes of the Credit Agreement, and whether they can safely reject drawing requests based on the occurrence of such Material Adverse Effect.  We have advised Lenders that MAE determinations are very fact specific and depend on the language of the Credit Agreement and the nature of the impact of the underlying event on the specific Borrower and its industry. In addition, courts have imposed a high bar on MAE determinations.  Lenders have generally decided to honor all drawing requests absent existing Events of Default and so long as other applicable borrowing conditions have been satisfied.  Lenders considering rejecting a drawing request based on the occurrence of an MAE should consult with counsel.

  2. Damages for Rejecting a Borrowing Request—If a Lender does elect to reject a drawing request based on its belief that an MAE exists, the Lender should consider the consequences of a court later determining that in fact no MAE existed.   As part of the analysis, the Lender should consider whether the Credit Agreement contains a waiver of consequential and punitive damages provisions.  Such provisions have been upheld by certain courts, but conferring with counsel is recommended prior to rejecting a drawing request due to an MAE.

  3. DACAs—It is good practice to make sure that the proceeds of out of the ordinary course revolver draws are placed in deposit accounts subject to DACAs, as opposed to ordinary course disbursement accounts, which are often not subject to DACAs.  Now is an opportune time to make sure that all of the Borrower’s existing deposit accounts (except for certain excluded deposit accounts, as set forth in the Loan Documents) are subject to DACAs.

  4. EBITDA---Lenders should review with counsel EBITDA definitions in Credit Agreements with respect to Borrowers that are likely be affected by Covid-19, in order to anticipate the use by Borrowers of existing EBITDA add-back provisions (such as "business optimization", "run-rate cost savings" and "non-recurring/extraordinary losses/expenses" add-backs). Borrowers are likely to request additional specialized add-backs for Covid-19-related lost income and expenses, which Lenders will need to carefully consider.

  5. Lender Concessions—Some Lenders are considering permitting Borrowers to pay interest in kind, instead of requiring cash pay, as well as allowing amortization and ECF payment holidays.  Some Borrowers have requested blanket waivers of financial covenants for 2020, extended periods for delivery of financial statements and permission for Sponsors to make subordinated loans to Borrowers, among other things. If Lenders elect to provide such support, they should consider doing so in a manner whereby they preserve their rights and do not waive existing Events of Default that may be utilized if the current situation deteriorates further.

  6. Co-Lenders Liquidity—Some Lenders have expressed concerns about the ability of certain of their co-Lenders to be able to honor drawing requests.  Candid conversations with those co-Lenders seem appropriate, coupled with the sharing of information with the applicable Borrower.  If a co-Lender won’t be able to lend, Defaulting Lender provisions should be carefully reviewed, especially since many of these provisions will not have been previously used. Additionally, Agents should consider requiring receipt from all co-Lenders of requested borrowing proceeds before the Agent provides funds to the Borrower.

  7. DDTLs—Some Borrowers are asking that Lenders permit undrawn DDTLs to be used for working capital purposes, notwithstanding provisions in many Credit Agreements that limit the use of DDTL facilities to events such as Permitted Acquisitions and Capital Expenditures. Other Borrowers have taken aggressive positions regarding the permitted use provisions set forth in Credit Agreements for DDTLs.   Lenders should carefully evaluate all DDTL requests to confirm they conform with the Credit Agreement requirements. 

  8. Information Requests—Lenders should consider requesting additional information from Borrowers (such as information about supply chain disruptions, canceled orders, plant and office closures and possible layoffs) to better gauge expected future performance.

  9. LIBOR Floors—Lenders have asked us to review Credit Agreements to confirm that they have LIBOR floors or other protections against negative LIBOR. When amending Credit Agreements, some Lenders are increasing those floors.

  10. Mechanics—All parties are showing flexibility addressing the mechanics of signing documents (e-signing is becoming more acceptable) and arranging for delivery and return of possessory collateral (stock certificates and the like).

  11. File ReviewsWith respect to the most troubled Borrowers, Lenders should consider having counsel review the Loan Documents for missing materials, unperfected collateral or documentation holes that can be fixed as part of a waiver, forbearance or amendment.

  12. Long Term Reputation—Our clients know this better than we do, but their conduct in difficult times will be taken into account by Sponsors, Borrowers and co-Lenders when the Covid-19 crisis is over. Clients need to consider what action is in their best interest, both short-term and long-term.

 

 



March 23, 2020

Questions? Please contact:

Commercial Finance Practice Group
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Bankruptcy & Creditors' Rights Practice Group
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The material in this client alert is based on information existing at that time. It should not be construed as legal advice or legal opinions based on any specific set of facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, an attorney-client relationship.

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