What factors should borrowers consider in light of COVID-19 when negotiating new financing commitments and loan documents?
Borrowers seeking new financing should pay careful attention to the following terms and conditions in the financing commitment and loan documents:
- Representations and warranties should be carefully reviewed to determine the effect COVID-19 may have on the borrower and its business and, in certain cases, representations and warranties should be modified to include materiality and knowledge qualifiers. In particular, borrowers should scrutinize any representations and warranties that are forward-looking.
- Financial covenants should be reviewed to determine whether the thresholds and testing periods for such covenants allow enough cushion for the borrower to forecast compliance with the covenants. 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 as a whole. Pre-approved cure rights (e.g., equity injections or other shock adjustments) should be negotiated into such covenants.
- Material adverse effect or change clauses should be carefully defined and limited so that the borrower understands whether the impact of COVID-19 can trigger such material adverse effect or change and thereby allow lenders the ability to terminate advances on a line of credit (and thereby constrain working capital) or call a default under the loan documents.
- Cross-defaults with other financing arrangements, contracts, or other agreements that may also be potentially affected or interrupted should be limited or eliminated.
- Defaults related to death or disability of individual borrowers and guarantors should be modified to allow the borrower to substitute loan parties that satisfy the lender’s underwriting standards.
- Notice and opportunity to cure periods should be examined to determine whether additional time may be necessary to cure a default caused by the COVID-19’s negative impact on the business’s financials or operations.
- Construction timelines and force majeure clauses should be reviewed and modified to extend or excuse delayed performance to accommodate for any future impact COVID-19 might have on labor, supplies, or materials in connection with a construction project.
Last updated March 16
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