COVID-19 – Funding Considerations | Orrick, Herrington and Sutcliffe LLP

Unfortunately, we are living through one of the most extraordinary times that any of us can remember. The prevailing hope and expectation is that the current extraordinary times and the disruption that follows will be temporary. The increase in cov-lite and cov-loose funding in the European market also hopefully means that in many cases borrowers will have more breathing room than in previous downturns. That said, funding concerns will inevitably have to be taken into account.

  • Maintain liquidity: In such an uncertain environment, the priority from a financing point of view will likely be to ensure that the borrowing group has sufficient liquidity to enable it to face economic and market disruptions.
  • Borrowers may wish to consider (and indeed many do) withdrawing their revolving credit facilities in full to maximize flexibility, notwithstanding additional interest charges, and to ensure that the facility is not interrupted in the future. ‘to come up. Removal of any future issues related to the “no fault” standard and repeating the conditions for removing unfulfilled performances if the current situation deteriorates further. In agreements with an incipient financial agreement (i.e. tied to a percentage of the uses of RCF drawn), it should be considered that pulling the RCF in its entirety will trigger the need to test the financial agreement, in particular. especially when the original financial model may I have not planned to be tested at this point.
  • Provided that capital can be called up or is readily available, shareholders or sponsors could consider injecting more equity, either by recourse to equity, in accordance with the terms of the relevant facility agreements, to remedy a breach of a financial agreement or to generally provide liquidity. and / or to avoid any violation of the planned commitments. Depending on the circumstances and the treatment of the equity injections in the underlying facility arrangement, it is likely that the equity injection to support liquidity and net debt prior to any anticipated breach of financial covenants (where this is is allowed) would be more advantageous for the group. than to wait for a violation and use the prescribed mechanism of fairness healing. This approach would avoid or minimize constraints on how the additional capital might be applied or otherwise included in the documentation calculations. On the part of discerning shareholders / sponsors, it is likely that they will want to be protected from the lingering economic uncertainty by wanting to structure any additional equity infusion with appropriate preference terms. It should be possible to structure these equity investments to achieve similar classification and repayment incentives to debt, while still being treated as equity from a legal point of view and for the purposes of constraints and calculations. in the financing documentation. This additional equity could (assuming this is allowed) also be injected in the form of subordinated debt. Noting that, in all cases, fairness treatment of rating agencies may also be considered.
  • EBITDA or similar financial metrics will (or should be) scrutinized to see how they are affected. EBITDA is a key measure in the facility contract, not only for financial covenants but also for authorizations based on ratios such as authorized debt obligation and various baskets in other covenants. Proactive quantification of the impact on EBITDA of the coronavirus situation in real time will be important in managing the overall liquidity impact (e.g. with respect to the need and / or provision of additional liquidity). There is a current debate on whether to add the impact of the coronavirus on EBITDA. While much depends on the specific terms of the facilities agreement, it is highly unlikely that specific Coronavirus EBITDA additions can be made. That said, there were a couple of deals that came into the market right before the syndicated debt and high yield markets closed, which effectively included an increase in EBITDA for the loss of revenue from the coronavirus. This approach would transfer the underlying risk to lenders, as the issues are masked rather than addressed.
  • Optimizing the capital structure: Before the coronavirus situation, many borrowers / issuers were already planning to refinance or re-debt given the low interest rates in effect. With syndicated debt and high yield markets now effectively closed, the focus will increasingly be on balance sheet monitoring, as there is now no clear access to markets for easy refinancing and / or re-indebtedness. . When the markets reopen, we expect prices to rise and / or conditions to tighten, at least initially. However, the current market volatility will provide some borrowers / issuers with an attractive liability management opportunity (i.e., given that debt is currently trading, borrowers / issuers may seek to repurchase part of the debt. debt discount). Borrowers and issuers may also consider using available liquidity lines from their partner banks and / or debt financing or, perhaps, private securitization structures available to the group to further increase liquidity.
  • Distress situations: the restructuring dynamic will naturally be different in the era of “cov-lite” / “cov-loose”. Since lenders have fewer early warning triggers (such as significant financial commitments), they will find themselves brought to the table much later than before. The borrower’s sponsors and management teams will therefore have a greater responsibility to proactively address situations of distress and potential distress themselves. In any event, we wouldn’t expect to see many (if any) implemented by lenders. Given the level of distress throughout the economy and impacting the overall market, we would expect lenders to be extremely reluctant to take enforcement action. However, if troubled investors were already in the capital structure before the coronavirus situation, they may act opportunistically and seek to ‘take the keys’ from the borrower.
  • UK Government COVID-19 Programs:
  • On March 17, HM Treasury and the Bank of England announced a Covid Business Finance Facility (“CCFF”), which will operate for at least 12 months. The CCFF will provide funding to companies that were in good financial health before the shock of the coronavirus. This will be done by purchasing commercial paper (ie an unsecured short-term debt instrument) issued by companies (or their financial subsidiaries) that make “a significant contribution to the UK economy”. This commercial paper must (i) have a term of one week to twelve months; (ii) where applicable, have a credit rating of at least A-3 / P-3 / F-3 from S&P, Moody’s and Fitch as of March 1, 2020; and (iii) be issued directly in Euroclear and / or Clearstream. Commercial paper with non-standard characteristics, for example stretchability or subordination, will not be accepted. Commercial paper issued by the following companies / entities will not be eligible for CCFF: banks; construction companies; insurance companies; other financial sector entities regulated by the Bank of England or the FCA; leveraged investment vehicles; or companies within groups that are primarily active in companies subject to financial sector regulation. Although pre-issuance of commercial paper is not a requirement, the CCFF actually looks like a support mechanism for good quality companies that, due to market conditions, find it difficult to issue new commercial paper or to roll up any existing commercial paper. As such, it seems very difficult for indebted companies or their subsidiaries to benefit from CCFF.
  • HM Treasury has announced and advanced the implementation of the Coronavirus Business Interruption Loan Program (the “Program”). The program, effective March 23, 2020, is now available from participating lenders. The program is designed to support the continued provision of finance to UK businesses and to offer more attractive terms both for businesses applying for new credit facilities and for the respective lenders. The system provides the lender concerned with a partial government-backed guarantee (80%) for the outstanding balance of the facility concerned (subject to an overall ceiling per lender). This potentially allows a “no” credit decision from a lender to be a “yes”. Although the borrower still remains fully responsible for the debt, the government, in addition to providing the aforementioned collateral, will make a payment to cover the first 12 months of interest and fees collected by the lender. Any facility provided under the program must be for a maximum amount of £ 5 million and for a period of six years for term loans and asset finance facilities and three years for overdrafts and overdrafts. invoice financing facilities. The program can be used for unsecured facilities of £ 250,000 and less. For unsecured installations over £ 250,000, the lender must establish a lack or absence of collateral before they can use Scheme. To be eligible for the program: (i) the company must be based in the UK; (ii) have a turnover not exceeding £ 45 million per year; (iii) have a loan proposal that would have been, without the current coronavirus situation, considered viable by the lender; and (iv) the provision of financing, in the opinion of the lender, will enable the company to overcome any difficulties in the short and medium term.
  • Direct loan: anecdotally, it seems that direct lenders still see many opportunities for deploying capital. Especially since volatility has taken hold of term B credit and high yield markets. The current volatility is likely to slow the financing activities of direct lenders. It should also be noted that distressed investors may start to come in. Although it currently appears that distressed debt investors can keep their powder dry until the market finds a bottom before considering d ‘invest.

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