COVID-19: Impact on existing financings in Austria
The coronavirus (COVID-19) outbreak has widespread and significant implications for the financing situation of companies. Mandatory emergency measures, such as closure orders, have cut off entire sectors from revenue and cash flows with severe consequences for corporate liquidity. In addition, deteriorating market conditions are putting additional pressure on companies and their ability to service their debt.
Against this background, it is crucial for borrowers to take a pro-active approach and enter into a dialogue with creditors early on. Also, both borrowers and lenders should have a clear picture of their rights and obligations under their financing documents.
In particular, parties should consider the following:
- Representations: Borrowers may find themselves unable to give certain representations. These may include the correctness of financial documents or other information provided to creditors, the validity or enforceability of the facility agreement or the status of any material contracts or licenses.
- Financial covenants: Borrowers will currently not be in a position to model any potential impact of COVID-19 onto their balance sheets or business plans and will not be able to determine whether they will be in compliance with their leverage and liquidity ratios (e.g. LTV, debt service cover, interest cover or equity ratios) at the testing dates approaching.
- Information undertakings: It is essential to identify information obligations and relevant thresholds and time periods in this respect. These may include obligations for a borrower to notify lenders of changes to the borrower’s financial condition or of any potential or actual events of default.
- General undertakings: Borrowers might also face difficulties to comply with any other undertakings. Depending on the type of financing, these may also include keeping material agreements in place (such as agreements with major tenants in real estate financings). Any immediate rescue measures may conflict with restrictions of the financing arrangements.
- Events of default: Any payment default will generally constitute an event of default giving lenders the right to cancel commitments, accelerate outstanding amounts and enforce security. Apart from that, an event of default may occur due to an actual or threatened suspension or cessation of all or a material part of the borrower’s business or due to a deterioration of its financial situation, including in a specific jurisdiction (e.g. sovereign default, state of emergency). Moreover, parties should carefully consider any cross-default provisions and whether a waiver or extension of a payment deadline under any other facility agreement may constitute a crossdefault.
- Other clauses: COVID-19 may have numerous other implications under facility agreements. For example, the “Business Day” definition may have to be amended in case a prolonged closure of banks will delay loan repayments. Furthermore, we recommend to review any force majeure clauses and whether these have any effect in light of COVID-19. Besides this, parties should analyse material adverse effect clauses and assess their consequences.
- RCFs and back-up facilities: It should also be considered whether in the current circumstances, borrowers can access funds by drawing down amounts under revolving credit facilities, utilise any available swing lines or separate back-up facilities.
- Crisis and insolvency: If a default becomes inevitable, companies and their directors as well as creditors should understand their rights and obligations under existing restructuring and insolvency frameworks and how to leverage the flexibility afforded by these laws – including any recent changes, such as the proposed prolongation of insolvency filing requirements from 60 to 120 days in Austria.