by Michael Hanley , Tim Waghorn April-22-2020 in Banking & Financial Services, COVID-19

In the last few weeks actions taken by both the state and lenders to support businesses have resulted in supports, such as the well-publicised three month moratoriums offered to customers, being put in place swiftly in response to the impact of the COVID-19 pandemic.  On 30 April, the Banking and Payments Federation Ireland (BPFI) confirmed that BPFI members including the five retail banks, non-bank lenders and specialist lenders have agreed that the previously offered three month moratoriums for personal borrowers and SME business customers may be extended by a further three months to a total of six months in total.

 

Breathing space

More than one month into the physical distancing restrictions imposed in the state and almost one month into the initially three-month and potential six month moratorium period, both borrowers and lenders now need to ask, “what next”?

Recent news reports indicate that COVID-19 restrictions in other countries are being or will soon be relaxed and everyone looks forward to this applying more widely.  However, it seems unlikely that life will immediately return to the way it was pre-COVID-19 and in the remainder of the periods of interim/immediate measures both borrowers and lenders need to prepare for the “new normal” and the impact of this on their financing arrangements. 

 

Borrowers – what next?

Given the recent announcement of the possible extension of moratoriums borrowers will need to consider re-engaging with their lender as early as possible to avoid any delay due to a possible surge of requests towards the end of the initial three month period.  An extension may give a borrower more time to prepare a request for formal changes to its borrowing arrangements, but borrowers will need to take account of the fact that during any payment moratorium interest will continue to accrue.

At the end of the moratorium period a borrower will need to be in a position to present a request to its lender for any formal changes to its borrowing arrangements with appropriate supporting information.  To be able to prepare such a request a borrower needs to consider what areas of its borrowing arrangements may it be unable to comply with and to what extent.  Key areas to consider within loan arrangements include:

Payment provisions

Can the borrower continue to comply with scheduled payments of interest and principal?  Does an extension of the terms of the loan need to be requested?  Will there need to be a restructuring of the loans?

Insolvency provisions

Are there any technical insolvency provisions that might be in issue?  If there is a balance sheet insolvency test, it may be necessary for this to be varied/waived.

 

Directors will need to separately consider their directors’ duties in relation to insolvency issues.

 

Repeating representations

These will be facility specific but usually include a requirement for periodic confirmation of no material adverse change in financial condition.  It should be considered whether this can be given or if that would be a misrepresentation.  It is likely that accounts to be delivered to the lender will show the impact of business and operational restrictions imposed due to COVID-19. 

Labour / employment disputes

 

Employment issues may arise out of COVID-19 restrictions due to employee lay-offs/furloughings, disputes around salaries, disputes in relation to working conditions and protective measures.  Provisions in facility agreements requiring confirmation on a periodic basis that there are no such issues could result in a breach of the facility agreement if such issues arise.

Taxation provisions

 

Facility agreement provisions requiring that borrowers remain up to date in relation to tax filings and payments may be impacted by cashflow issues.  Whilst the state may be willing to defer payments in some circumstances the terms of a facility agreement are unlikely to consider such exceptional occurrence

Financial covenants

 

As with non-payment provisions the effect of COVID-19 restrictions on Cashflow and earnings may very well result in cashflow cover and interest cover tests being breached.  Leverage tests are also likely to be affected if there is a significant drop in earnings.

Cross default provisions

 

If a borrower has other debts and other lenders, engagement with those other lenders will be needed if there is a cross-default clause to avoid any non-payment or breach causing cross-defaults.

Cessation of business

If the facility agreement includes an event of default relating to cessation of business this may also cover suspension of business.  This could be triggered by COVID-19 operational restrictions preventing businesses from opening/operating.

Having considered what areas of its loan arrangements that it may need amended or waived to ensure continued compliance, a borrower should also consider its current status and prospects in order to assess the manner in which it may need to address its request to its lender.  In this context it may be helpful to speak to tax advisors, accountants and legal counsel to assist with this assessment and identify any other matters which may require attention.

Lenders have emphasised that when requesting amendments/waivers borrowers need to be prepared to show they have taken action to avail of supports available to their business and have taken actions to reduce costs and expenditure and protect liquidity.  Borrowers should take this time to consider whether any of the Enterprise Ireland or SBCI schemes are suitable and available.

We would also expect that a borrower will need to be able to:

  • provide evidence showing that but for the current COVID-19 situation, it expected to be in compliance with the terms of its borrowing documentation. This may include financial projections.
  • show where it is not currently in compliance and is seeking an amendment/waiver, a roadmap back to compliance and details of how it can comply with the proposed amended terms it is requesting.

Possibly the most important element of the above for any borrower is to undertake this exercise as soon as possible, establish a dialogue with its lender(s) and be ready to submit its formal requests and engage with its lender(s).

 

Lenders – what next?

Lenders, not unlike borrowers, are contemplating the terms of loan arrangements that are in place since (i) they need to have reached an internal decision as to the approach in relation to breaches that could be ascribed to COVID-19 issues and (ii) they need to have planned for the potential volume of requests that are expected to be forthcoming as current moratorium arrangements come to an end.  Whilst all loan agreements will need to be reviewed and considered in their own right, relevant considerations include:

  • how the current moratoriums are being treated from a capital and regulatory perspective, for regulated lenders adhering to CBI guidance in terms of assessing and categorising risk (higher risk amendments requiring a more costly capital allowance treatment). This designation will impact on the lender’s consideration of amendments and waivers.
  • that financial forecasts may be needed to reflect (i) immediate cashflow and asset preservation efforts and (ii) a longer time period for forward looking forecasts reflecting recovery and a move towards trading on the “new normal” basis which is being looked forward to.
  • on what basis amended terms can be supported by it, for example:
    • what is the value of any collateral held in relation to the relevant loan and is that impaired? Should additional collateral or equity investment be sought as part of any amendment/waiver process?  Is this likely to be commercially available and realisable?
    • whether there needs to be a recognition (whether later in the term of the loan or otherwise) of the lender’s costs of funding increasing and of the lender’s support for the borrower during these challenging times.
  • any ongoing policies around COVID-19 support both internally and from the State.

 

Implementation

Once a borrower is adequately prepared to make its request for amendments/waivers this should be submitted to the lender, borrower and lender should remain in contact and discussions as to the requested amendments and how these are documented should take place. 

 

A final thought

As there is now approximately 2 months left of the initial moratorium periods that have generally been granted by lenders, the time to carry out preparatory action is now.  All parties need to be ready for the inevitable engagement that will be required either in respect of any moratorium extension requests and subsequently in the later part of this year once these end given the challenging times arising from COVID-19.

 

For more information on any of the issues raised above, please contact Michael Hanley mhanley@hayes-solicitors.ie or Tim Waghorn twaghorn@hayes-solicitors.ie

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