Lindsay Lee: Five things to consider when entering into credit agreements in the COVID-19 ‘delay’ phase
Lindsay Lee, practice development lawyer at Brodies LLP, details what things should be considered when entering into credit agreements during the current COVID-19 ‘delay’ phase.
With the Government expected to declare a transition from the ‘contain’ to ‘delay’ phase in its response to COVID-19 what should lenders and borrowers be focusing on when negotiating new credit facilities?
The ‘delay’ phase will involve encouraged home-working, school closures and restrictions on large gatherings, all of which could impact on borrowers’ businesses. Lenders will be expected by their regulators to treat COVID-19 effects on borrowers responsibly. Both lenders and borrowers alike should be focusing on, and where appropriate having discussions around, the following credit agreement issues:
- Financial covenants: careful attention needs to be paid to financial covenants which the borrower is to give, particularly profit- and cashflow-based covenants, which could be impacted by the economic impact of COVID-19 in the short- to mid-term.
- Headroom: the parties might consider providing for financial covenant headroom for a limited period to help the borrower through the expected high impact period of COVID-19.
- Waivers: discussion and drafting around future waiver requests to address the specific impact of COVID-19 on the borrower’s business for a limited period might be included in the credit agreement or by side letter.
- Repayments: the borrower’s ability to make repayments should be subject to additional stress testing, reflecting the possibility of reduced cashflow in the expected COVID-19 impact period, and the knock-on effects this would have on triggering one or more events of default should be tracked through
- Material adverse change: consideration could be given to drafting an exclusion for the effects of COVID-19.
While the extent of the financial impact COVID-19 is uncertain, an active dialogue on the above points can anticipate and address specific issues and facilitate a successful long-term lender-borrower relationship.