Covid 19: Coronavirus and its impact on corporate finance arrangements

Covid 19: Coronavirus and its impact on corporate finance arrangements

The coronavirus pandemic has already impacting the hospitality, leisure and tourism industries – and it doesn’t look like it’ll be over any time soon. The unpredictable nature of the virus has essentially caused the travel industry to halt, but the pandemic’s reach is affecting businesses in every sector.

It’s more crucial than ever for CFOs to be aware of their obligations when it comes to reporting, and to carefully manage their company’s financial arrangements. They will also need to take into consideration the response of lenders in the events of default, or material adverse changes. 

It is important to note that PLCs and AIM listed companies are legally obliged to disclose any changes to their trading performances due to COVID-19 even if it seems obvious to stakeholders. The UK’s Financial Reporting Council (FRC) recently wrote to companies to remind them of the requirement to incorporate principal risks and supply chain/consumer demand uncertainties in their annual reports, as these both affect a company’s business model. 

What happens if the company defaults?

When a company has an agreement with a lender, such as a loan, it is required by law to provide reporting information so that the lender is fully aware of the company’s financial health. If a company fails to provide the required information under its financing agreements, or if it fails to meet a scheduled repayment, this can often result in an immediate default resulting in the prevention of any further drawings being made under that particular loan. This would usually mean that the loan automatically becomes repayable, in full, immediately.

A material adverse change (MAC) clause is designed to allow lenders to call in a loan – i.e. to make a demand to be repaid – in certain stated circumstances. A MAC clause is normally completely bespoke and follow no set format, as they are usually industry- and circumstance-specific. 

When a company is experiencing financial difficulties as a direct result of the coronavirus, lenders are more likely to use the terms in the contract – for example if a breach of repayment obligations has occurred – rather than using the MAC clause as an argument.

In these challenging times, it is likely that lenders will be keen to engage with debtors in order to try and avoid further financial decline, and this is likely to be encouraged by both the government and financial regulatory authorities. Of course, lenders must consider their own financial obligations and risks, and try to ensure that they are not leaving themselves exposed to vulnerability particularly in the industries that are mostly being affected by the pandemic.

What practical steps can businesses take to mitigate financial deterioration due to coronavirus?

First of all, speak with your lawyer, accountant and/or financial advisor. Ask them to help you discern your company’s ability to comply with your financial contracts, and set up any scheduled payments if required. If you’re unable to meet payments, speak to your creditors and lenders – it is in their best interests to help you. 

It’s an uncertain time for us all financially, so it’s more important than ever to ensure that you have a strong and clear contingency plan which is fully adaptable to the difficulties we are facing in the current climate.

We’d be happy to help you during this turbulent time if you are feeling any uncertainty about the impacts that coronavirus is having on your business. Please do feel free to get in touch with us.

This note comprises the view of the author as the date written. This note is not a substitute for legal advice. Information may be incorrect or out of date and may not constitute a definitive or complete statement of the law or the legal market in any area. This note is not intended to constitute advice in any specific situation. You should take legal advice in specific situations. All implied warranties and conditions are excluded, to the maximum extent permitted by law.