COVID-19 (Coronavirus) is rapidly evolving in Australia and the impact to businesses locally is profound.
Below are a few practical tips for Australian borrowers when considering the consequences of COVID-19 on their existing and future financing needs, and how best to navigate those needs at this difficult time.
We are seeing different liquidity approaches from Australian corporates - some are deferring borrowing and debt issuance decisions, others are drawing down undrawn term / revolving credit (RCF) facilities and going to market to source as much debt as they can before things become more uncertain. For those companies looking to have as much liquidity available as possible to get them through this crisis, we recommend that they act now before your financing options narrow. Financing options for Australian borrowers include:
Existing Debt Facilities
Undrawn debt facilities - while existing debt facilities, and in particular any undrawn term / revolving credit (RCF) facilities, are the most obvious place to turn for liquidity, COVID-19 may cause defaults (including but not limited to MAE) - and those defaults could act as a draw-stop to accessing these facilities. See below at "Existing Financing Considerations" for further details on how COVID-19 will impact your Existing Debt Facilities.
Amend and extend - a readily available option and one which we are already seeing strong Australian borrowers utilising are "amend and extend" arrangements with existing lenders on existing debt facilities. Obviously, a simpler option for bilateral facilities - there is greater complexity with syndicated facilities.
In times like this, while the appetite of Banks to meet their existing commitments, or to supplement them with addition capital, tends to be constrained, Banks are far more likely to be amenable if they are approached well in advance of any expected credit crunch.
The market for new equity capital markets (ECM) and debt capital markets (DCM) issuances and US private placements for Australian companies is largely closed, and there seems little to no appetite to raise equity or debt under current market conditions. The significant corrections we have seen recently to equity capital markets has seen share prices drop to levels as low as the 2008 GFC and underwriters are not in a position to underwrite a capital raising with any sort of timetable that stretches out more than a few days. If an underwriting were to occur under these conditions it would be very quick in the market with a very short settlement time or at a very significant discount. For further information on how COVID-19 is impacting Capital Markets. Read more
New Bank Debt
Banks will still look for bridging facility opportunities for their core clients that have shelved longer term plans like ECM / DCM issuances or US private placements, or who need to complete on pre-committed M&A. While credit committee standards remain high, we expect these bridging opportunities will be available to Australian corporates at the higher end of the credit spectrum.
The Private Credit markets, and in particular the private debt funds, remain open and have plenty of committed capital to deploy. Private Credit funds are also flexible and can work with/around any existing capital structure that a company may have in place making them ideal for short/medium term solutions that can be repaid or refinanced when markets and economic activity reverts to the mean. While Private Credit is typically not cheap, it is better than running out of cash while your business tries to weather the storm - provided that you do not commit to "non-call" periods or other tough restrictions on early repayment, Private Credit money is a flexible solution that can be replaced promptly once the crisis has abated.
Existing Financing Considerations
Australian borrowers should be actively reviewing their existing financing arrangements to assess the existing and potential impact of COVID-19, including:
Material Adverse Effect
Check your MAE definition to see if this capable of being triggered by your lenders. While we expect lenders will be reluctant to trigger an event of default based solely on an MAE (lenders were also very reluctant to do this during the GFC), as noted at "Liquidity Considerations: Existing Debt Facilities" above, we expect lenders to be less reluctant to use MAE as a draw-stop to accessing undrawn term / revolving credit (RCF) facilities.
- Will COVID-19 impact your business / revenue to such an extent that your financial covenants are likely to be breached?
Representations / Undertakings / Events of Default
- Are your representations still true and are you able to repeat them at the times specified in the loan agreement?
- Are you complying with the undertakings and events of default in your loan agreement?
- What grace periods and other thresholds do your reps, covenants and events of default benefit from?
- Will COVID-19 impact your ability to comply with your information undertakings, including the delivery of financial statements?
- Do you already have an existing or potential default? If so, when do you need to disclose this to your lenders?
- Do you need waivers for any existing defaults, upcoming default (including a financial covenant breach) or upcoming actions which are not permitted in your loan agreement?
- What are the voting thresholds and mechanics for obtaining a waiver?
- Is your company at risk of insolvency, in terms of cash-flow projections? See some further short discussion below at "Solvency Considerations - Safe Harbour Measures".
Solvency Considerations - Safe Harbour Measures
The revenue impacts of this crisis may well imperil cash-flow solvency for some otherwise solid businesses. Australian "insolvent trading" laws applicable to directors are relatively onerous (compared to other jurisdictions), and perhaps do not assist during this difficult period.
That said, the "safe harbour" from insolvent trading - enacted during 2018 - represents a potentially very valuable form of evasive action for good companies looking to trade through this period. Consider whether or not "safe harbour" measures should be taken, as a part of your financing/refinancing activities - we expect both existing Banks and potential new Private Credit providers to be supportive of such measures being implemented over the coming weeks and months.
The Global Angles
For further information on how COVID-19 is impacting finance transactions globally. Read more
Other Considerations for Borrowers
For further information on how COVID-19 is impacting Australian Business, listen to a podcast here from a team of Baker McKenzie experts who assess the implications on a broad number of subject areas, including "M&A and MAE" and "Managing your workforce", each set out below. Read more
M&A and MAE
Companies are already looking at cost contraction measures for contract flexibility as well as relying on force majeure and Material Adverse Effect (MAE) clauses that entitle a business to suspend or terminate contractual obligations.
On an M&A transaction, a company's ability to rely on a MAE clause depends on both the specific drafting of the clause and the required thresholds. It also remains critically important that any MAE clause in your acquisition loan agreement mirrors the one in your SPA, so that the lenders are required to fund where a buyer is required to close an acquisition, even in the event of a COVID-19 downturn.
Managing your workforce
See our related recent client note from the Australian employment law team - this note outlines an employer's key legal rights and obligations and also sets out various measures which may assist in the current crisis and any future viral outbreaks. Read more