CHINA DIRECT would like to sincerely thank CBI member, Burges Salmon for producing a briefing document to assist businesses struggling with negotiations with lenders during the COVID19 emergency.
The briefing document contains advice to businesses who might need to default on loans or draw stop as a result of reduced trading and profitability during this virus period.
Material Adverse Change:
According to Burges Salmon, because during the Global Financial Crisis of 2007/2008 the majority of lenders did not rely on Material Adverse Change clauses as either a draw stop or event of default, now that COVID-19 has spread to affect the global economy, there is no reason why lenders would take a different approach under the present circumstances. Burges Salmon advise that businesses pay more attention to specific events that could cause a company to default on their loans than the more general, and unspecific nature of Material Adverse Chance clauses.
Financial Covenants:
Burges Salmon suggests that businesses would be better served by reviewing any financial covenants they hold with lenders and whether poorer than expected financial performance arising from COVID-19 will result in a breach.
According to Burges Salmon, the three key things to consider are:
- Are the covenants calculated against historic performance or do they also look forward?
- How much headroom was built into the covenant levels as against expected financial performance at the time they were set?
- Are there cure rights? And is the business, or are the owners and other stakeholders in a position to exercise those?
Burges Salmon advise that in the case of historic only covenants, any breach will only occur in the future, when the trading period has finished, and the covenants are tested against financial information for that period; buying business time.
In the case of look forward covenants, Burges Salmon advise that it should be fairly clear whether or not the covenants will be complied with at the next test date, depending on the preservation of, or disruption, to that income stream. That said, Burges Salmon expect lenders to be reluctant to seek to exercise their rights, and to call default based on a breach of covenant, when the means of remedy is at best uncertain and at worst unknown.
Talk to your lender:
The key concluding message from Burges Salmon is to maintain open and continual dialogue with those with which your business might owe money during this unpredictable period.
To read the report in full, please follow the link.
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