COVID-19 Q&A | Sintons | Banking & Finance
During these unprecedented times, where the situation is changing on a daily basis, we are aware that individuals and business owners will have many questions and uncertainties about how these developments impact on them.
Here, through a series of Q&A with expert lawyers from across our firm, Sintons hopes to be able to answer some of those pressing questions, and provide some certainty and clarity for people who are unsure how to proceed.
We will bring you a question and answer per day for the next few weeks.
Q – My business has a loan from a bank with regular repayments being made. I am worried that in the current economic circumstances, the business won’t be able to make the repayments. What should I do?
A – Find a copy of your loan agreement and review the document. If you don’t have a copy, ask your bank for one or, if a solicitor acted on your behalf, ask them for a copy of the signed document.
Speak to your banker and explain the problems the business is currently facing so that they can work with you to discuss the options available.
Loan agreements contain many different terms and it will probably not just be the repayment obligations that need to be reviewed. Other clauses which the business may have problems complying with are:
Financial Covenants – these are financial calculations which are calculated on a regular basis (monthly/quarterly depending on the terms of your loan agreement). If cash flow in the business has dramatically reduced and you have a financial covenant that monitors cash flow you will need to speak to your bank about an immediate or future covenant breach.
Loan to Value – the value of any property you own which has been provided to the bank as security against the amount of your debt. This is an ongoing covenant and one which in the current climate is likely to be breached with property values falling.
Undertakings – statements that are repeated on set dates in accordance with the loan agreement. These statements, subject to the exact wording, have to be “true and correct” when made and repeated. It may be that some of the statement are no longer true and correct in the current climate.
Material Adverse Effect or Material Adverse Change (MAC) – MAC provisions typically allow for a lender to call an event of default in situations where the borrower’s position is substantially deteriorated from the date that they entered into the loan agreement. The provisions tend to be heavily negotiated so it is important you understand the MAC clause applicable to your business. From our discussions with all the major banks the clear feeling is, for these lenders, not to rely on MAC clauses but work together with their customers however all borrowers should be mindful of these clauses if the time comes when your lender can no longer continue to support the business.
Cessation of Trading – the majority of loan agreements contain an event of default if the borrower ceases or threatens to cease trading. If you have had to do so as a result of the Governments instructions you will need to discuss this with the bank.
Abandonment – if your loan is to finance a development it is likely to contain a clause whereby an event of default occurs if the development is abandoned for more than a set period of days. The earlier you discuss matters with your lender generally speaking the more favourable they will be to working with you and the business.
Tenant Breaches – if your loan agreement is dependent upon rent from tenants you will need to look carefully at the covenants regarding the income from these tenants not just in terms of financial covenants but also if the loan agreement contains any clauses regarding key tenants and their own financial status, occupancy levels, tenant breaches.
The above are just some of the clauses that are most likely to be relevant and ones which you will need to discuss with your bank. We can help you to identify the relevant clauses, discuss the same with your bank and propose amendments or temporary waivers to ensure your business remains viable and functioning during the pandemic and thereafter.