For many companies and businesses, the untimely outbreak of COVID-19 has been stressful, creating uncertainty and doubt. At the time of writing this article, the Government’s closure of businesses, including hospitality, transport, retail and many labour intensive industries, has expectedly reduced trade and forced companies and businesses to consider their commercial interests during this period.
Many companies and businesses have financial arrangements that are key to their commercial operations. Companies and businesses need to carefully manage these arrangements.
Financial difficulties suffered by a company or a business, existing or anticipated, may trigger an event of default. Companies and businesses must review the financial covenants of their arrangements, to the extent any financial difficulties resulting from the current situation surrounding COVID-19 amounts to a breach of these covenants. Many finance arrangements are drawn up with covenants to protect the lender in the event of companies and businesses, as borrowers, are suffering from financial difficulties. However, those financial arrangements are usually reliant on the borrower co-operating and making the lender aware as soon as possible. Any breach of covenant that leads to delayed correction and resolution can have severe long-term effects on a company or business, including the ability to seek new financial arrangements in the future.
Many financial arrangements also have provisions for Material Adverse Change (also known as MAC) designed to capture and measure the effect of unpredictable and unforeseen events or circumstances. The provisions for MAC vary with every financial arrangement. However, the scope of the definition for MAC is often drafted widely, often referring to changes in “business, operations, property, condition or prospects of the borrower” or “on the ability of the borrower to perform its obligations”. It remains to be seen if MAC clauses will be triggered in the current situation; companies and businesses should review their financial arrangements to determine if MAC clauses exist and if the clause’s precise wording is triggered by the effects of COVID-19.
Companies and businesses are advised to speak to their lenders and discuss the options available to them in the event there may be a breach of financial covenants or a trigger of existing MAC clauses.
For advice on financial arrangements, please contact Claudine Lawrence, Partner and head of our Corporate and Commercial Department on 0203 827 6117 or firstname.lastname@example.org.