As COVID-19 continues its spread, nearly every industry is feeling the effects. Companies and lenders alike are looking at how this unprecedented event will impact current financing arrangements. Because most financing arrangements are bespoke, it’s important to review your loan documentation carefully – taking a close look at the various provisions, including the following:
Consolidated Net Income and EBITDA – As disruptions and social distancing continue to bleed into the bottom line, consider extraordinary losses (or potential extraordinary gains depending on your
industry) or any increased and one-time expenses and costs that may be captured in financial covenant calculations. Often addbacks relating to these items have baskets, are subject to lender approval or in some instances require certifications by the borrower.
Revolver Draws – It is often said that “cash is king,” and during this time of uncertainty, companies may be seeking additional liquidity in the form of revolver draws, either as a matter of urgency or simply as a precautionary measure. Prior to any borrowing, however, the borrower must certify to the lender the continuing accuracy of all of the borrower’s representations and warranties under the loan agreement.
The key question in our current environment will likely be whether the borrower is able to continue to represent and warrant, taking into account the pandemic and any government-imposed countermeasures, that there has been no material adverse change in the borrower’s business or financial condition. In an asset-based facility, given the rapidly changing circumstances, changes to the eligibility of accounts receivable should also be reviewed, as accounts which were once eligible may have become ineligible in between borrowings. Under some credit facilities, a significant revolver draw may also have the effect of “springing” to life financial covenants that were otherwise dormant.
Mandatory Prepayments – As companies look to create liquidity, equity and debt issuances and asset dispositions may trigger a mandatory prepayment to be applied to the outstanding debt. Absent a discussion and waiver with one’s lender, such mandatory prepayments may otherwise negate a borrower’s perceived benefit of such actions.
Equity Cure Provisions and Limitations – Many sponsor-backed financing arrangements provide the ability for an equity infusion to cure a looming or existing financial covenant default. Often these provisions limit the frequency, timing and aggregate dollar amount of such equity cures. During this time of uncertainty, we
recommend that lenders and borrowers maintain clear and frequent communication and carefully review their loan documentation to tackle the various challenges the novel coronavirus presents.
Calfee invites you to visit our COVID-19 Resource Center containing First Alerts to help guide you through the challenges faced by individuals and organizations as a result of the novel coronavirus outbreak. We are committed to helping you meet the diverse and complex challenges and navigate the disruptions caused by this pandemic. Please check the COVID-19 Resource Center regularly for the latest updates, or subscribe to receive the most up-to-date Alerts sent directly to your email inbox.