Lenders scour finance documents amid volatile markets

NEW YORK, March 18 (LPC) – Lenders from some of the world’s largest corporations are working on debt deals to see if they can cite the rapidly spreading coronavirus as a reason to avoid funding previously committed funding.

Banks, sponsors and businesses have asked their legal counsel whether lenders are allowed to abandon committed funding or not fund existing revolving lines of credit, as the fallout from the global pandemic is a so-called significant adverse change ( MAC).

Lenders have also looked at the language of credit representation in agreements to see if current market conditions could have deteriorated a company’s financial health, allowing banks to back out of their commitments.

Concerns over the rapidly spreading virus sent markets into a frenzy, with the Dow Jones Industrial Average falling more than 30% between early February and Wednesday, and the LPC 100, a cohort of America’s 100 most liquid loans, dropping any further. up 12% in the past six weeks to 86.61 cents on the dollar on Tuesday, the lowest level since June 2009.

At the end of January, the World Health Organization (WHO) declared the outbreak a “public health emergency of international concern”. More than 214,000 people worldwide have been infected with more than 8,700 deaths as of Wednesday, according to data compiled by the Johns Hopkins Center for Systems Science and Engineering.

The virus has disrupted supply chains, shut down retail stores and reduced consumer demand as cities around the world encourage residents to stay at home, all actions that are expected to lead to lower revenues for businesses. S&P Global Ratings said on Tuesday that the global economy could be heading into a recession.

“It is reasonable to expect that as this pandemic continues and borrowers demand large drawdowns on committed lines of credit and acquisitions are planned, lenders will take a close look at whether financing terms are met. fulfilled, ”said Seth Jacobson, global director of the Skadden law firm. , Arps, Slate, the banking group of Meagher & Flom.

Companies, including hotel operator Hilton Worldwide, have used their guns to preserve financial flexibility, a move made by many blue chip borrowers and leveraged during the financial crisis to ensure access to cash.

Borrowers pay for revolving lines of credit, even when not in use, so they can access cash when they need it. Lines of credit can be used to finance working capital or as a stopgap during a supply chain disruption, according to Victoria Ivashina, professor of finance at Harvard Business School.

“I can see how a bank would want a certain option to be able to prevent a run on revolving credit lines, but the banks are there precisely to help businesses weather liquidity shocks,” she said. “Banks that finance revolving lines are an important part of what they do for an economy. “

MAC ATTACK

Lenders have reviewed their documents to see how specific covenants for each affected borrower are drafted for committed financings and existing revolving lines of credit, according to Jake Mincemoyer, director of the Americas banking unit at White & Case law firm.

Revolving lenders, in particular, want to understand their options and determine whether a MAC clause could be triggered if a lender is uncomfortable funding a direct debit request due to current market conditions.

“Calling a MAC is a very strong statement to make and one that carries a great deal of responsibility for the ripple effect it can have on a business with other creditors and transactions. This is something lenders are wary of because they want to get it right, ”said Jennifer Daly, partner at King & Spalding law firm.

“However, shy of calling a MAC, lenders can use the question of whether a MAC can exist as an opportunity to start a larger conversation about tighter terms in credit documents.”

Lenders also consider the language of documents regarding the health of a business.

As a condition of entering into a loan agreement, a borrower is required to provide a certificate of creditworthiness, which usually states that after the transaction, the company will have sufficient capital to pay off its debts.

A similar credit condition may exist for companies looking to draw on their revolving lines of credit, according to Jessica Reiss, head of leveraged loan research at Covenant Review. A breach of a credit statement and warranty could result in default.

“A credit condition is important because lenders shouldn’t be forced to lend if a business knows from day one that it won’t be able to repay its loan,” she said. “Why would lenders give a business money under these circumstances? (Reporting by Kristen Haunss; Editing by Michelle Sierra)


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