In addition to the substantial health concerns related to the outbreak of the coronavirus (COVID-19), the disruption of business for many companies will have a significant negative impact on cash flow and ultimately banking and financial relationships for those affected. Below are finance issues borrowers should consider during this unprecedented time.
Borrowers should consider how their projected cash flow will affect the financial covenants contained in their loan documents. Borrowers should determine the next compliance test date and whether notice is required to their lender ahead of such date based on the projections. If the loan is a CMBS mortgage loan, failure to meet financial covenants could result in the triggering of a cash sweep of all operating income from the encumbered real property.
Other Events of Default
Borrowers should carefully review all other events of default contained in their loan documents. For example, does the list of events of default include a material adverse change clause or an insecurity clause? Will an event of default trigger a cross default with other debt?
Short Term Liquidity
If availability on a revolving credit facility is based on a borrowing base, borrowers should determine the value of eligible accounts receivables and inventory and request a maximum advance against the borrowing base based on current values. If the credit facility is not tied to a borrowing base, borrowers should immediately draw on their lines of credit to maintain liquidity during the outbreak of COVID-19. If availability is limited based on current loan balances, commitment caps or a borrowing base, borrowers may need to reach out to their lenders for additional short-term availability until the outbreak subsides. In addition, there are proposed government assistance programs designed to provide loans to support working capital needs for companies during the outbreak. Some of these proposed programs include loans for distressed businesses provided by the Small Business Administration (SBA).
Loan Modifications, Restructuring and Work-outs
When an event of default has occurred, borrowers will need to start a dialogue with their lenders to determine what next steps will be required. Negotiation of the terms of any proposed loan modifications or restructuring during a work-out should involve the advice of the borrower’s accountants, financial advisors and attorneys. Lenders may request additional collateral or new or expanded personal guaranties in connection with a loan modification. Loan modifications may also impact intercreditor arrangements with other lenders or loans the company may owe to its stakeholders. Restructuring agreements could also come in the form of a forbearance agreement. Any proposed loan modification, restructuring or forbearance agreements should be reviewed by financial advisors and attorneys.
Borrowers should consider renegotiating any interest rate floors contained in their loan documents. In addition, long-term fixed rates may be able to be converted to lower short-term variable interest rates, depending on the terms of any prepayment penalties or SWAP breakage fees.