In brief
The recent escalation of conflict in the Middle East is prompting lenders and corporate borrowers using LMA based facility agreements to revisit and assess contractual protections, risk exposure and operational assumptions. Key issues include Material Adverse Effect (MAE) assessments, possible draw stops and sector specific impacts.
It is important to note, at the outset, that although many facilities follow LMA template documentation, several terms (especially MAE definitions) are often negotiated. Any assessment of risk should therefore be carried out on a case-by-case basis.
As a general matter of good practice, we would always encourage open and prompt communication between borrowers and lenders as and when disruption is expected or has occurred to ensure maintenance of constructive relationships as both lenders and borrowers navigate the conflict together.
Lender considerations
Lenders should actively monitor portfolios, particularly where borrower exposure to affected jurisdictions or sectors is higher and should assess whether the conflict could trigger (or contribute to) an MAE or other protections.
Typical LMA based MAE definitions look to whether an event has (or is reasonably likely to have) a material adverse effect on the borrower or its group’s business, operations, property, financial condition or prospects. This may be relevant where:
- Operations are disrupted due to security concerns or regional instability
- Assets or key facilities are damaged or inaccessible
- Supply chains or logistics networks are compromised
- The borrower or its group’s financial condition deteriorates due to loss of revenue or business interruption
MAE assessments are fact specific and often involve judgement, so lenders should document the basis for any conclusion. In addition, the conflict is seen to impact sectors differently, depending on reliance on physical operations, cross border movement and local stability. Any assessments or preventative action shall also consider sector specific impacts and their implication on analysis of contractual terms. MAE or draw stop scenarios may not be relevant for borrowers in industries that remain resilient notwithstanding the conflict, unless they face broader macro‑economic impacts.
Where an event of default materialises, lenders should consider whether it is appropriate or constructive to call such event and take acceleration action, or whether it is more appropriate to reserve its rights to assess how the circumstances have arisen and what remediation steps may be taken in order to preserve the relationship and the borrowers’ overall business and operations without further disruption.
Borrower considerations
Borrowers should be cognizant of their facility terms and support offered by the government in the applicable jurisdiction (if any). It would also be prudent to consider any insurance-related mandatory prepayment mechanisms and any contractual obligations that are capable of being impacted and any effects of such impact on obligations under their facilities.
Most facilities will require prompt notice of events adversely affecting the business and of any defaults that may occur. In addition, an inaccurate repeating representation, even if driven by external events, may lead to a draw stop and, if left unremedied, could ultimately become an Event of Default.
Borrowers should also be prepared to provide updated financials, forecasts, and operational reports to reassure lenders of stability and compliance, as would be expected during previous periods of market stress. Expect increased lender scrutiny of:
- Operational continuity and risk mitigation procedures
- Financial forecasts and liquidity positions
- Accuracy of contractual representations, especially those tested at each utilisation
- Any circumstances that might be construed as a material adverse change
For specific advice on the above matters or other related concerns may apply to your facilities, please contact the authors of this note.
*Mohammed Bahaian, Trainee Associate, has contributed to this article.