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COVID-19: Issues for financing agreements

Thursday, April 9, 2020

In the space of a few weeks COVID-19 has had an impact on the economy, businesses, consumers and daily life beyond what any of us might have imagined when we first heard of the virus.

Social distancing and containment measures have impacted on the way business is conducted and led to the closure or restriction of many businesses, with many thousands of employees having been laid off as a result. Businesses, the community and institutions of the State have shown admirable solidarity and spirit in the face of this challenge.

For many businesses the immediate focus has been on crisis management and business continuity management. While the government was quick to announce initial measures to support workers and businesses it quickly realised that these measures were going to be insufficient and financial supports remain under review as the government grapples with the fallout. Lenders, businesses and consumers will need to focus on the medium term viability of their businesses and, for those businesses which have had to close, their ability to reopen and repair the damage done.

Adopting terminology we have all become familiar with as part of Covid19 daily briefings, businesses should consider phasing their response to the financial impacts of the crisis, in the following terms, Containment, Delay, and Mitigation.

1. Containment
Businesses which have not been required to close entirely are trying to maintain some semblance of business as usual, working remotely and implementing business continuity arrangements. Some businesses have repurposed to temporarily supply much needed medical and PPE equipment, such as antibacterial hand gels or (in the case of some restaurants) offering “click & collect” take-out food.

2. Delay
As the crisis continues more businesses will experience closure or substantial restrictions on their activities, with a significant cashflow impact. Such businesses will rely on the short term forbearance and support of their suppliers, landlords and lenders pending more formal arrangements being agreed. The government has held meetings with the five main lenders and their representative body, BPFI, and they have pledged to support businesses and the government strategy in this crisis. Some of the interim measures announced include a three-month COVID-19 payment break for affected borrowers, a proposal that such borrowers would not be classified as “non-performing” during this window and the deferral of court debt recovery proceedings for three months. Banks have been afforded some leeway by the Central Bank, which has released the counter-cyclical capital buffer requirement to enable them to utilise additional liquidity during this period.

During this period, businesses need to consider their supply contracts, leases and financing agreements and engage at the appropriate level with suppliers, landlords and financial institutions, and to prepare detailed plans for the mitigation phase.

Businesses will need to consider how they can address a range of difficulties and potential events of default, including:

  • non-payment defaults due to business closures or collapse of revenues;
  • breach of financial, other covenants or KPI targets;
  • material adverse change or material adverse effect provisions in loan agreements;
  • insolvency and other events of default being deemed to occur;
  • information undertakings and other notifications required to be made under loan agreement;
  • obligations to remit/pay VAT and corporation tax to the revenue commissioners.

3. Mitigation
For many businesses the mitigation stage will be key to their ability to weather this crisis and its consequences, which may evolve into a sustained recessionary period. Many businesses will have experience of this type of process (far too recently in the case of some of them). However, moving beyond the initial delay stage, any proposed forbearance arrangements will require clear thinking and strategy by both borrowers and lenders; as both groups know from the last financial crisis, it is not possible to keep “kicking the can down the road” indefinitely and each business can only sustain a finite level of debt.

During the delay phase businesses should have begun to consider their financial positions, in terms of cashflow, cashflow projection, debt service capacity and devised new business plans/strategies to manage and stabilise their business in a manner that is consistent with their financing arrangements. Important considerations include:

  1. Overdrafts: Is additional working capital required/sustainable? How long will the crisis and any recessionary consequences last?
  2. Revolving Credit: some businesses may have access to committed funding lines which may be available to be drawn down (if they have not already done so). Businesses should consider any conditions precedent or utilisation requirements in their loan agreements which may make availability conditional. Actual or potential events of default, material adverse change provisions and representations to be made on the date of each utilisation may create barriers to drawing down such funding.
  3. Term Loans: ‘Extend and mend’ forbearance and extensions may assist businesses with term loan obligations, pushing out maturity dates, reducing repayment instalments and possibly considering warehousing part of its debt to be refinanced at a later date.
  4. Additional Equity: businesses may consider taking in external investment after the crisis to support the recovery of the business, and/or existing shareholders may be in a position to inject additional equity to support a financial restructure with a lender.

No matter what approach is settled upon, a range of consents, waivers, financial covenant resets and amendments will need to be put in place between lenders and many borrowers to implement the longer term arrangements needed to support recovery.

Sadly, for some businesses recovery may not be possible and in those cases insolvency will lead to a different range of considerations in terms of the extent of security provided for loans, rent obligations to landlords and suppliers, and any personal guarantees provided to creditors. Directors need to consider carefully their duties under the Companies Act and take appropriate action in the best interests of the company and in a manner consistent their fiduciary duties.

A summary of some of the additional financial support mechanisms available to businesses during this pandemic crisis is available here.


If you have any questions regarding the terms of your loan agreements, the extent of your obligations, in terms of financial and other covenants and representations, or proposed restructuring proposals please contact our Banking and Finance Team or your usual Philip Lee contact so that we can provide practical advice to affected businesses in this very difficult time.


Simon O’Neill


Jonathan Kelly