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Update--What To Expect in the Days to Come

Top Lender Issues re COVID-19[1]

March 30, 2020

  1. MAE and Drawing Requests Under Existing Credit Agreements—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.  UPDATE:  Status quo.  Lenders continue to discuss drawing requests, and to our knowledge have so far generally shied away from rejecting such requests based solely on an MAE condition.  In a few cases, Lenders have honored a drawing request, but have reserved their rights to assert later that an MAE related to COVID-19 had occurred; this approach would have no effect on the advance already made, but could permit the Lenders to deny future requests for advances, and permit the Lender to claim that a misrepresentation was made by Borrower at the time of the initial drawing request. 

  2. MAE Under New Credit Agreements, Amendments and Forbearance Agreements— Borrowers are arguing that loan agreement definitions of Material Adverse Effect should be revised to carve out COVID-19 related consequences. Lenders will need to consider these requests carefully, in light of the nature of the particular business, in order to make sure that any such carve-outs are not drafted too broadly.  We are aware of one transaction that closed last week (for a Borrower in an industry that is not expected to be too badly impacted by COVID-19) that included such a carve-out.

  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. UPDATE: More than any other action item, Lenders are working with their counsel and Borrowers to make sure that all applicable deposit accounts are subject to a DACA.

  4. 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. UPDATE:  We have had the opportunity to prepare and review form amendments that certain Lenders are using for their loan portfolios.  When Borrower liquidity is an issue, a number of Lenders (although not uniformly) are agreeing to defer March 31 principal payments until maturity, provide temporary over-advances in ABL deals, PIK some or all interest due with respect to the current periods and waive the 2019 ECF payment in cash flow deals (with a corresponding exclusion of the retained 2019 ECF from the “available amount basket”, if applicable).  Certain Lenders may also be motivated in part to provide payment accommodations to its Borrowers, because the Lender's own funding sources may restrict funding for credit facilities that are in payment default.    Although not necessarily the market norm, some clients are waiving March 31 financial covenant tests (with appropriate safeguards to protect against even worse than anticipated financial results when the related Compliance Certificates are later delivered). With some frequency, Borrowers are asking that Lenders extend the delivery date for 2019 audited financials.  When making these types of accommodation, Lenders are requiring, among other things, that Sponsors defer management fees and that junior lenders agree to PIK interest.  For the most part, we have not seen clients agreeing to longer term solutions.  The approach seems to be to provide immediate relief and then try to better understand what is likely to happen with each individual Borrower.    Longer term financial covenant relief is agreed to only when accompanied by a more substantial quid pro quo such as an infusion of new equity and/or higher pricing.  As longer term solutions come into play (and even for some short term solutions), Lenders consider shoring up collateral (getting liens on collateral that the Lender initially agreed to forego), adding cash-hoarding provisions and unwinding a number of highly favorable Borrower/Sponsor terms that in recent years made their way through the lending market.

  5. 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.  UPDATE:  In spite of the concern, so far we have not heard of any co-lender defaulting on its funding obligation.

  6. New Deals—The message that we have been receiving from most of our clients is consistent, “We want to see new deals, although we will need to see a thorough impact analysis for the expected effects on the business of COVID-19, and we will require higher pricing, lower leverage and more favorable credit agreement terms.”

  7. Distressed Debt Funds—Distressed debt funds seem to be waiting in the wings to jump into deals if a Borrower’s current Lender and equity holders are not prepared to provide liquidity.  The funds are marketing in force.  Selling loans to these funds could implicate Disqualified Institution provisions.

  8. Equity Cure Provisions—Sponsors are looking for more flexibility--remove limits on number of times that cure provisions can be used; allow cure Dollars to “purchase” EBITDA even in amounts in excess of the amount needed to cure covenant defaults; allow for equity to go in to cure prospective defaults; allow equity cures in the form of junior debt; and waive any requirement that the proceeds of a cure be used to pay down debt.

  9. Government Relief—Borrowers are exploring eligibility for new SBA loans, although this relief may not be available for most PE backed deals. We will no doubt learn more about this in the coming weeks. If those loans are available, will existing Lenders consent to the Borrower’s incurrence of such loans?

  10. Business Interruption Insurance—While certain Borrowers can make colorable claims that they are entitled to payment under the current insurance policies, the insurers will likely deny coverage. Do not count on those policies as a source for near term liquidity.  Lenders should watch out for Borrowers invoking an EBITDA addback for expected business interruption insurance.

  11. Mechanics—Many 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). UPDATE:  Continued cooperation is the norm.   While several banks (as opposed to non-regulated financial institutions) remain unwilling, others are quickly implementing procedures to allow electronic signatures to documents. Virtual video meetings, while not unheard of, were not the norm prior to COVID-19, but with increasing frequency, we are seeing meetings within organizations held via GoToMeeting, Skype and similar services.  Similarly, meetings among Lenders and their Borrowers are being conducted virtually, using a video component.   

  12. 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. UPDATE: Lenders appear to be evaluating their loan portfolio and contacting us to address issues pertaining to those Borrowers who have been, or are likely to be, most severely impacted by COVID-19.

[1] If you missed our March 23 alert you can find a copy on our website and our LinkedIn page.



March 30, 2020

Questions? Please contact:

Commercial Finance Practice Group
website

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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