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Coronavirus – A selection of issues borrowers and treasury departments should consider – Sweden

  • Sweden
  • Banking and finance
  • Coronavirus
  • Coronavirus - Country overview
  • Financial institutions

25-03-2020

 

The Coronavirus (COVID-19) outbreak is causing disruption to businesses and markets across sectors and jurisdictions. In this briefing we offer some practical tips for borrowers, treasury departments and customers in relation to loans and other financial services. To the extent applicable, Lenders may also wish to consider applying some of these tips. The below list is not exhaustive but may serve as a catalyst for consideration of issues applicable to your specific situation.

1. Transparent communication with banks and financiers

Parties may wish to keep an ongoing and transparent dialogue with all banks and financial service providers. In particular, treasury departments may wish to intensify their dialogue with their core group of banks. In light of these unprecedented circumstances and common industry challenges faced as a result of the COVID-19 outbreak, parties should also co-operate and discuss with other partners and even competitors independently, or through treasury associations and official or unofficial networks.

As no one knows the level of disruption that the COVID-19 outbreak will cause and how lenders and financial service providers will react, borrowers may need to consider creating or re-establishing contacts and relationships with these providers.

2. Communication to the market(s): Disclosure Requirements

Applicable stock exchange or other market rules apply irrespective of the COVID-19 outbreak. Parties should keep a watch on temporary shutdowns and changes or recommendations in relation to existing market rules. Listed companies should consider how the COVID-19 outbreak impacts the company and its business in the short and long term taking into consideration the applicable disclosure requirements, e.g. profit warnings and monitoring the development.

Parties should remember that the COVID-19 outbreak also impacts the authorities and their possibility to maintain normal service level and administration.

3. Regulatory: Internal Policies

Parties should assume that applicable regulatory requirements remain unchanged but should keep a lookout for new changes. Parties would need to consider whether the COVID-19 outbreak has led to other or more rigid duties within the existing regulatory framework, e.g. in relation to reporting, monitoring, crisis plans, system sensitive departments or operations. The same approach would apply to internal policies, e.g. treasury policies, delegation policies or resolutions, mandates, authority to pass resolutions and entering into agreements, or considering that it may not be business as usual due to changed circumstances.

4. Security, Margin Calls, Close-Outs and Valuations

It may be worth checking if the finance documentation contains undertakings that offer additional security or covenants with the effect that a decrease of the market value of provided collateral (e.g. real estate, aircraft and publicly traded shares) may result in a default or covenant breach. As a consequence, if there are provisions on the manner in which a valuation is to be carried out, these provisions may also be worth reviewing to foresee a potential upcoming breach and, if the decrease in value is due to disruptions in the market caused by the COVID-19 outbreak, try to obtain a waiver. It should be noted that banks’ general terms and conditions for loan agreements (e.g. terms based on the Swedish Bankers Association) sometimes states that it constitutes an event of default if the provided security is no longer satisfactory.

It may also be worth checking the terms of margin agreements and derivative instruments regarding margin calls and close-outs for potential traps and risks. The COVID-19 outbreak has caused disruption and volatility to the financial markets leading to margin calls and settlement disruptions with the result that defaults may become more widespread.

5. Cash Management, Liquidity and Receivables Arrangements

Parties’ liquidity and cash flow are generally negatively affected by extraordinary events such as the COVID-19 outbreak. Parties may wish to consider their cash management and liquidity prognoses as well as the terms of back up facilities and other liquidity arrangements, and to what extent they may be utilised under the present circumstances.

It is not uncommon that parties delay payments or request extended payment terms in unusual situations such as the COVID-19 pandemic, affecting cash flow. If a factoring or other receivable sale and purchase arrangement is in place, parties may wish to review the eligible criteria for receivables in order to mitigate and foresee unwanted breaches or obligations to return or reassign receivables.

6. Business Days

Payment dates in a finance document typically fall on Business Days. The definition of “Business Day” normally refers to days on which banks are open for general business and exclude Saturdays, Sundays and (in some cases) public holidays in relevant jurisdictions. Some countries have already announced additional public holidays and this, as well as days on which banks may be closed for business, could occur (or reoccur) as the situation evolves. Parties may wish to consider the impact of such additional days which are not Business Days on their obligations in finance documents, e.g. particularly with obligations to disburse or make payments or serve notices.

7. Payment Dates and Other Periods

In addition to reviewing how the term “Business Day” is defined, parties may also wish to look at the operative provisions to ascertain whether a disbursement or payment date would fall on the preceding or succeeding Business Day of the original disbursement or payment date, to avoid any breach.

Notice periods or grace periods in finance documents would also typically be defined by reference to Business Days. Parties may wish to consider if more time may be available for a party to discharge an obligation or remedy a default as a result of any additional public holidays.

8. Reporting

Borrowers may wish to review the deadlines by which they are obliged to deliver financial statements, valuation reports or technical advisers’ certificates (if applicable) under their finance documents. The interruptions caused by COVID-19 may have an impact on borrowers’ contractual performance of their information undertakings if professional advisers are not able to timely carry out their work.

For listed companies, it may be worth checking whether the stock exchange has or will put into place any emergency measures to deal with the difficulties faced by the borrower in publishing annual results and dispatching annual reports by the deadlines in accordance with the applicable listing rules. Parties may wish to consider whether it is appropriate to temporarily resort to an alternative information reporting regime similar to the emergency measures (if any) adopted by the stock exchange on which the borrower is listed. Parties may also wish to consider whether it would be desirable in the present circumstances to provide for more flexibility of such timing.

10. Financial Covenants and Rating Requirements

COVID-19 may have an impact on the borrower’s ability to comply with their financial covenants and, if applicable, rating requirements. It is not uncommon that grace periods are unavailable for breaches of financial covenants and rating requirements in loan financings. In such cases, borrowers may wish to assess the likelihood of a breach in advance in order to have the requisite waiver in place prior to a breach occurring. See above in relation to “Security, Margin Calls, Close-Outs and Valuations”.

11. Default and Events of Default (EOD)

Whether impacts of COVID-19 might give rise to an event of default under a loan financing, depends on the description of the events of default in the loan or finance documentation. Parties may therefore wish to review the default and events of default catalogues in their financial documentation (see also “Security; Margin Calls, Close-Outs and Valuation”, “Financial Covenants and Rating Requirements”, and “Material Adverse Change - MAC”). For example, suspension of business could be an EOD but whether an actual suspension would trigger this EOD depends, among other things, on:

• how the EOD is described, e.g. (i) whether it applies to the business of the borrower, any other obligor or the group (taken as a whole), (ii) whether it applies to the relevant business(es) in whole or in part and (iii) whether there is any grace period or exception to suspension; and

• the extent of the actual suspension.

In addition, borrowers, lenders and, if applicable, rating agencies, may wish to consider that a breach may risk triggering unwanted cross-defaults elsewhere.

12. Force Majeure

The force majeure clause has been in the spotlight and addressed by many in light of the COVID-19 turmoil. It may also be worth checking if documentation contains a force majeure clause or if reliefs may otherwise be available under general principles of contract law. Documentation may sometimes also contain events of default described as the occurrence of a force majeure event over a certain time period under other contracts. Suspension of performance by any contracting counterparty to the obligors under other contracts may also constitute an event of default. Such events of default are not commonly found in standard loan documentation but may be found in development financings, project financings, certain lease agreements and similar arrangements.

13. MAC – Material Adverse Change

It is quite common for loan financings to contain an event of default on material adverse change, often referred to as the “MAC” clause. General terms and conditions, e.g. terms based on the Swedish Bankers Association, normally include a broadly worded acceleration right for the lender in such event. The actual wording of the MAC clause is important in the context of COVID-19 as there are many varieties of MAC clauses.

14. Consents and Waivers

Parties may wish to avoid the occurrence of a default by anticipating what the potential defaults could be and request a waiver or consent to extend deadlines under the relevant finance documents.

Parties should bear in mind that the process for applying for a waiver or consent is more complex in syndicated loans than in bilateral financings. Parties should check (i) whether the matter requires consent from majority lenders, super-majority lenders or all lenders, (ii) any ‘snooze-you-lose’ time-barrier provisions and (iii) whether any grace period is available.

Borrowers may consider informing their lenders how the COVID-19 outbreak is impacting the borrowers’ businesses and contractual performance. Borrowers may also want to ensure that sufficient details are clearly specified in any waiver or consent request. Borrowers should also be prepared for a situation where a waiver or consent may not be obtained in time and that the resulting default could potentially trigger cross-defaults under other contracts. Therefore, borrowers may want to review if any waiver should be sought under other contracts to avoid a chain of cross-defaults.

15. Obligation to notify the Occurrence of Default

Borrowers are to be reminded that they may have a contractual obligation under their loan financings to notify the agent/lenders of the occurrence of a default even if the grace period is still running.

 

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