Lenders scour financing documents amid market volatility

NEW YORK, March 18 (LPC) – Lenders to some of the world’s largest companies are working through debt agreements to see if they can cite the fast-spreading coronavirus as a reason to avoid funding previously committed financings.

Banks, sponsors and corporations have been asking their legal counsel if lenders are permitted to drop out of committed financings or not fund existing revolving lines of credit because the fallout from the global pandemic constitutes a so-called material adverse change (MAC).

Lenders have also been looking at solvency representation language in agreements to see if current market conditions may have deteriorated a company’s financial health permitting banks to step away from commitments.

Concerns about the fast-spreading virus have sent markets into a frenzy, with the Dow Jones Industrial Average falling more than 30% between the start of February and Wednesday, and the LPC 100, a cohort of the 100 most liquid US loans, dropping more than 12% in the last six weeks to 86.61 cents on the dollar Tuesday, the lowest level since June 2009.

In late January, the World Health Organization (WHO) declared the outbreak a ‘public health emergency of international concern.’ More than 214,000 people globally have been infected with over 8,700 deaths as of Wednesday, according to data compiled by the Johns Hopkins Center for Systems Science and Engineering.

The virus has interrupted supply chains, closed retail operations and reduced consumer demand as cities around the world encourage residents to stay home, all actions that are expected to result in lower earnings for businesses. S&P Global Ratings said Tuesday that the world economy could be heading toward a recession.

“It is reasonable to expect that as this pandemic continues and borrowers request large drawings under committed credit lines and acquisitions are scheduled to close, lenders will look closely as to whether funding conditions are satisfied,” said Seth Jacobson, global head of law firm Skadden, Arps, Slate, Meagher & Flom’s banking group.

Companies including hotel operator Hilton Worldwide have drawn on their revolvers to preserve financial flexibility, a move many blue-chip and leveraged borrowers made during the financial crisis to ensure access to liquidity.

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

“I can see how a bank would want some optionality on being able to prevent a run on revolving credit lines, but banks are there precisely to help companies weather liquidity shocks,” she said. “Banks funding revolving lines is an important part of what they do for an economy.”


Lenders have been looking at their documents to see how specific clauses for each relevant borrower are drafted for both committed financings and existing revolving lines of credit, according to Jake Mincemoyer, head of law firm White & Case’s Americas banking unit.

Revolving lenders, especially, want to understand their options and determine if a MAC clause could be triggered if a lender is uncomfortable funding a drawdown request due to current market conditions.

“Calling a MAC is a very strong statement to make and one that carries with it a lot of responsibility of a ripple effect it can have on a company with other creditors and operations. It is something lenders are cautious about because they want to get it right,” said Jennifer Daly, a partner at law firm King & Spalding.

“Shy of calling a MAC, however, lenders can use the question of whether a MAC may exist as an opportunity to start a broader conversation around tightening terms in credit documents.”

Lenders are also looking at document language regarding the health of a company.

As a condition to closing a loan agreement, a borrower is required to provide a solvency certificate, which generally states that after the transaction, the company will have sufficient capital to pay its debts.

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

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

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