In this unprecedented time, private equity sponsors and their portfolio companies and other corporate borrowers are concerned about access to liquidity as well as compliance with payment and other obligations under their credit documents.
We have recently seen various government regulators focused on ensuring that financial institutions work with issuers. For example, the Executive Order 202.9, issued by New York State Governor Andrew M. Cuomo on Saturday, March 21, 2020, declares it an “unsafe and unsound business practice” if a bank does not grant a forbearance to a business that has a financial hardship as a result of the COVID-19 pandemic. The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, issued by the board of governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the State Banking Regulators encourages financial institutions to “work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.”
While these statements and orders may not be binding, they are instructive as to the current environment in which we expect lenders will appreciate the financial peril facing their borrowers and the need to work together to formulate creative and collaborative solutions to ensure their financing arrangements do not present an impediment to recovery.
The subsequent chart outlines borrower-friendly amendments that should be considered by borrowers to stay afloat until the economy gets up and running again:
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Debt Financing Credit Agreement Amendment Considerations
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| Preserving Liquidity |
- Defer interest payments or interest being paid-in-kind, in each case, until a specified date.
- Defer principal amortization payments or principal being paid-in-kind, in each case, until a specified date.
- Consider deferring 2020 administrative agency and collateral agency fees and other fees on a deal-by-deal basis.
- Waive or defer 2019 and 2020 Excess Cash Flow mandatory pre-payments.
- Consider waiving or deferring other mandatory pre-payments on a deal-by-deal basis.
- Consider modifications to disposition of assets provisions to permit, as applicable, (a) licensing intellectual property, (b) selling unused or obsolete inventory, (c) factoring receivables or other assets, and (d) accelerating settlements related to third-party claims.
- Remove some restrictions around equity cures, such as allowing cures during the fiscal quarter and allowing for cures beyond the amount necessary to comply with financial covenants.
- Exclude the impact of COVID-19 from the Material Adverse Effect definition so it is no longer a concern when bringing down representations in borrowing notices.
- Consider building in the ability to participate in applicable government bailout programs such as SBA loans.
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| Financial Covenant Compliance |
- Reset financial covenant holidays or financial covenant levels, in each case, until a specified date.
- Addition of EBITDA add-back for fees, costs, losses, charges, expenses and lost profits and revenues in connection with any natural disaster, pandemic, epidemic, disease outbreak or other public health emergency (including the Coronavirus Disease 2019 (COVID-19) or any similar or related disease caused by the SARS-CoV-2 virus), including any such items related to sourcing new supply chains.
- Consider modifications to relevant Consolidated Net Income adjustments and/or EBITDA add-backs, as applicable: (a) extraordinary, unusual, one-time or non-recurring fees, costs, losses, charges and expenses, (b) fees, costs, losses, charges and expenses relating to facility or operational shutdowns, (c) business interruption and other insurance proceeds, (d) reimbursable or indemnifiable costs, losses, charges and expenses, (e) restructuring fees, costs, losses, charges and expenses, (f) cost-savings initiatives, (g) goodwill impairment and (h) lost profits and revenues.
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| Financial Reporting Requirements |
- Extend deadline for delivery of 2019 and 2020 audited financial statements (and related compliance certificates on a deal-by-deal basis) and, if necessary, revise credit agreement to permit a going concern qualification relating to COVID-19 effects.
- Extend deadline for delivery of 2020 quarterly and/or monthly unaudited financial statements (and related compliance certificates on a deal-by-deal basis).
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| Events of Default |
- Waive default interest or convert default interest to be paid-in-kind.
- Waive the cross-defaults to certain indebtedness, if applicable, or material agreements.
- Review all Events of Default to determine whether any other default waivers are needed.
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| Eligible Assignees; Loan Assignments and Participations |
- Prevent lenders from assigning or participating the loans (including to a “Disqualified Institution”) without the borrower’s prior written consent.
- If not already included, amend credit agreement to provide the ability for private equity sponsors to purchase the loans subject to customary caps and voting limitations.
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| ABL Facility Considerations |
- Reduce excess availability or liquidity triggers due to greater-than-expected cash outlays due to COVID-19 expenditures.
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