Coronavirus (COVID-19): Impact on Credit Agreements
The outbreak of coronavirus COVID-19 requires the assessment of the impact on the performance of credit agreements, both by the creditors and by the debtors, considering, inter alia, the possibility of interruption of the chain of supply against the background of restrictions regarding transport, quarantine/stay of performance of employment agreements or working from home.
The major impact on the activities of companies may quickly trigger problems in the credit relations also for the creditors, who must act proactively for assessing the size and for limiting the adverse consequences. Especially the borrowers who have important clients or suppliers in the worst hit areas may be affected, but preparation is essential also for situations when the authorities impose measures to limit travels in general or as a consequence of detection of diseases among employees of the company.
Usually, the credit agreements concluded with borrowers limit the effects of force majeure and unforeseeable circumstances, the obligation to pay an amount of money being considered always possible, and contain clauses for the undertaking by the borrowers of the risk of change of circumstances (hardship). Borrowers are bound by the contractual obligations even if their performance becomes excessively onerous and they cannot request the adjustment of the agreement.
However, the effect on borrowers’ activity cannot be neglected, as creditors may encounter problems at the level of the portfolio of credits from a certain industry or geographical area. Moreover, borrowers may face difficulties related to liquidity against the background of the outbreak and may address their creditors financing requests to overcome the difficult period.
Creditors should diligently assess at least the following aspects in their contractual relations with their borrowers:
- Identification of borrowers whose activity could be significantly influenced by the COVID-19 outbreak;
- Check of the probability of observance of the financial covenants at the future reporting terms;
- Revaluation of the borrowers’ assets, including the assets used as guarantee;
- Cross-default clauses and the perspective of audit reports with qualifications related to the outbreak;
- To what extent the spread of COVID-19 may be considered an event with a significant adverse effect on a borrower;
- Conditions for restructuring/deferral of obligations during the crisis effects.
At a portfolio level, aspects that should be taken into account by creditors as regards the ongoing credit agreements:
- Preparation of plans for negotiation, restructuring and of mechanisms to avoid any possible disputes regarding the non-fulfillment of the obligations from the credit agreements;
- In the seriously affected areas deferrals/stays of the fulfillment of the payment (moratory) obligations may be considered;
- Discussions with the prudential supervision authorities to adjust the capital requirements or other requirements so that to allow creditors flexibility to the benefit of proper dealing with the adverse effects on the borrowers associated to the outbreak.
Borrowers should have in view the implications of the outbreak of COVID-19 and of the restrictions imposed to prevent its spread on the capacity of fulfillment of the obligations from the credit agreements:
- At a first stage, the analysis should regard the conditions for termination, stay of fulfillment of the obligations and penalties from the ongoing agreements with the main clients and suppliers, to identify the estimated effects on production, sale and related cashflows, identification of alternative suppliers;
- Analysis of the conditions of use in the case of the financing agreements that have not been fully used or have a non-binding character;
- Check of the impact on the financial obligations from the bank credit agreements, breach scenarios, analysis of the conditions for speeding up maturity for failure to fulfill the financial obligations;
- Check of the impact of rapid and significant falls on the financial markets, effects on the derived financial agreements;
- Cross-default clauses from various agreements of financing of the company;
- Necessity to obtain waivers or consents on the creditors’ part to avoid the perspective of considering due the entire financing in the audit reports.
- Initiation of discussions regarding the restructuring/deferral of the obligations during the crisis effects.
How Can We Assist?
We can assist with the legal analysis of the ongoing agreements to adjust the plans of continuity of the business and any necessary urgent measures from the perspective of the identified risks.
Any crisis scenario should be managed with specialized advisors, including legal advisors with multidisciplinary specialization, which would offer the necessary legal support to elaborate and implement the proper decisions at the level of the administration and management bodies.
In relation to the new financing operations, we can advise on the adjustment of the contractual clauses, analysis of the guaranteeing structure including from the perspective of the impact on the borrowers and guarantors, assistance on the management of the identified risks.
We can assist in the creditors’ negotiations with the debtors and other interested parties, as well as provide the legal support and the documentation support for the restructuring agreements, addenda for amendment of the financing documents, intercreditor agreements or additional guarantee agreements.
For the borrowers we can assist in the analysis of agreements, in relation to requests for waivers or consents on the creditors’ part and in the preparation and assistance in the implementation of strategies for renegotiation and mitigation of the negative consequences.