What provisions should be reviewed and monitored in existing credit agreements in light of COVID-19?
Borrowers should review the following terms and conditions in the credit agreement and other loan documents:
- Principal and interest amortization/repayment schedules.
- Ongoing representations and warranties to determine the accuracy or potential breach thereof.
- Affirmative covenants related to information undertakings to proactively prepare for a lender’s request for further information regarding the financials, assets and operations of the borrower. Also, obligations to provide notice to lender of any default by borrower or a third party under any material contract (e.g., material supply contract, lease agreement, construction contract).
- Material adverse effect or change definitions and applicability to representations and warranties, cessation of advances under a line of credit, and events of default.
- Financial covenants and the thresholds and testing periods related thereto. Testing periods may need to be extended so that compliance is not monitored until a future date when the borrower may have more certainty as to whether their business will be able to absorb any adverse financial impact COVID-19 may have on the borrower’s operations and industry. Pre-approved cure rights (e.g., equity injections or other shock adjustments) may need to be added to such covenants.
- Events of default triggered by a material adverse effect or change, insolvency, suspension or cessation of business, cross-default with other financing arrangements, contracts, or other agreements, death or disability of an individual borrower or guarantor, or lender’s insecurity.
- Obligations of the borrower to the lender to indemnify and reimburse the lender for fees, costs, and expenses (and, if applicable, losses and liabilities) associated with the lender’s investigation and addressing of any defaults, as such obligations and liabilities may present a financial burden on businesses experiencing cash constraints.
- Set-off clauses affording the lender the right to seize funds from the borrower and the guarantor in the event a default occurs under the loan documents.
- Financial reporting, including audit, requirements. Delays in delivering required financial statements and qualifications to an audit may trigger an event of default. Also, auditors may require credit waivers or forbearance agreements to issue the audit.
Last updated March 16
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