Commercial finance

The coronavirus outbreak has caused heavy distress on the global financial markets - so what does this mean to you and your business? It is important to examine your loan or credit agreement and loan documents. Pay particular attention to the provisions related to reporting requirements, negative covenants, and financial covenants. If you anticipate future breaches or defaults, talk to your lender sooner rather than later. Lenders tend to take much more drastic measures when they learn bad news after the fact. Finally, depending on the nature and extent of anticipated defaults, a borrower should consider looking for alternative financing solutions as soon as possible.

When reviewing your loan documents, pay careful attention to the following provisions:

  • Payments/liquidity: If cash flow is projected to decrease significantly, consider requesting deferred interest or principal payments, PIK rather than cash pay interest, or decreasing the frequency of such payments (i.e., quarterly, rather than monthly).
  • Financial covenants: The short-term impact of the coronavirus may not accurately reflect the long-term health of certain borrowers. When testing financial covenants, most tests look back to the trailing 12-month period and the covenant impact of the coronavirus outbreak could last well into 2021. Consider requesting the elimination of or a revision to certain testing periods for financial covenants, and, when testing resumes, do so on a build-and-roll basis rather than a trailing twelve month basis. Review the definition of “EBITDA” for the possible additions of specific add-backs for extraordinary, non-recurring, or one-time events or losses.
  • Borrowing base availability: For revolving loans that include a borrowing base component, the coronavirus crisis could greatly decrease a borrower’s availability due to declining values of inventory and receivables. Consider requests to temporarily increase advance rates, change eligibility requirements, or allow advances in excess of borrowing base availability.
  • Reporting requirements: Consider whether temporary adjustments are necessary with respect to monthly, quarterly, or annual reporting requirements. With respect to audited financial statements, consider whether such statements can be delivered on time if the borrower’s auditors are unable to access required materials at the borrower’s locations.

Our Commercial Finance Practice Group attorneys are experienced and well-positioned to help you navigate your financing needs. We have advised borrowers and lenders in all aspects of senior, subordinated, and mezzanine debt transactions. We will use our knowledge and expertise, as well as our connections in the industry, to develop the financing solutions that work best for you.

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