COVID-19 was first detected in Wuhan, China on December 31, 2019. In a matter of months, COVID-19 spread to several countries, and the World Health Organization declared COVID-19 a pandemic on March 11, 2020. COVID-19’s impact on Turkey, like everywhere else worldwide, has become the most important issue on business community’s agenda.
This alert is intended to help companies consider the potential impact of the COVID-19 outbreak on their financial obligations. We recommend you consider the following key issues in relation to your finance documents.
- Information covenants: Consider what information covenants (e.g. any defaults, events of default) may have been triggered by COVID-19 and identify the timeframes within which the information needs to be provided.
- Financial ratio calculation: Consider whether unforeseen costs and/or losses arising as a result of COVID-19 can be applied to adjust financial ratios. Determine when EBITDA is measured to conclude when downturn effect hits covenants.
- Incurrence based covenants: In the event that additional liquidity will be required in the short or medium term, confirm whether there are any covenants placing restrictions on the incurrence of additional indebtedness. Consider various structuring options to ensure flexibility.
- No Default representation: The “No Default” representation can often include a representation that no (cross) default of the borrower or any of its subsidiaries under any agreement occurred. If this representation is given and deemed to be repeated on certain dates, consider that you may fail to comply with any material contracts as a result of supply chain disruption or work force social distancing measures and this may be a breach of your no default representation.
- Material Adverse Change: To the extent your financing arrangements include a material adverse change event of default or representation, assess whether the current impact of COVID-19 would meet the definition, and if not, whether this might arise over time. Consider the consequences of a material adverse change under the relevant finance documents.
- Force Majeure: While it is unlikely that the performance of financial obligations becomes temporarily or permanently impossible due to force majeure, consider if the COVID-19 pandemic can be a force majeure for your financial obligations.
- Cross-default: Consider whether a default under a finance document would trigger default provisions in other agreements.
- Interest payment obligations: Consider your upcoming interest payment obligations and the consequences of the non-payment of interest.
- Rating downgrade: Review your finance documents to confirm whether a rating downgrade of the company could have adverse consequences.
- Near-term maturities: Consider whether any of your finance documents have any near-term maturity dates that may need to be refinanced or rolled over.
- Liquidity issues: Consider the available committed facilities, capacity for incremental debt incurrence, asset disposals, capital injections and other alternatives to mitigate or manage your liquidity issues and determine whether these actions are permitted under your existing finance documents.
- Prepayment and debt buyback: Assess your ability to fix a potential financial obligation breach with a prepayment or debt buyback. For example, a well-timed voluntary prepayment made with cash on hand could, as a result of reducing leverage, lower the margin and optimize the overall financing costs.
- Maturity extension/payment holiday/covenant reset: If the financial consequences of COVID-19 are significant, it may be necessary to amend finance documents to extend maturities, defer payments or reset the applicable covenants. These options will require creditor consent and will likely incur a consent/amendment fee. In case of multi-lender finance documents, simple amendments can typically be agreed with simple majorities, like more than 50% or 66%. However, more significant amendments such as a change to payment dates including maturity extensions and payment holidays will likely constitute a structural adjustment and may require a higher percentage threshold or even the consent of all lenders. Likewise, the lowest quorum for restructurings under the financial restructuring framework agreement is 66.6%.
Unfortunately, the financial and other obligations in your finance documents become more material in these difficult times. It is key for finance managers to review their finance documents in the light of the points above to achieve an early diagnosis and intervention which would pave the way for the company to survive these tough days with the least hazard possible.