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25 March 2020

The spread of the coronavirus (COVID-19) and the associated drastic measures taken by the authorities have significant, negative economic consequences for many companies. The forced partial or even complete closure of operations and the general restrictions on the free movement of goods and services as a result of the measures often lead to massive losses in sales. Operating costs can only be reduced partially and with delay.

For companies that are severely affected by the coronavirus, it is crucial that existing financing can be maintained in the coming weeks and months.

Lack of liquidity in companies vs. credit default at banks

Liquidity assurance

From the perspective of the company concerned, securing liquidity is currently of paramount importance. Even if government-guaranteed bridging loans at preferential conditions will be available quickly, it must be ensured that the company's previous lender, usually the house bank or, in the case of larger credit volumes, the banking consortium represented by the agent, is still prepared to make loan payments under existing financing agreements.

Risk of credit default

Even if the appeal to solidarity is currently omnipresent, the lender affected by this situation is also concerned with avoiding loan defaults. The lender will therefore examine whether he can refuse to pay out the loan under the applicable provisions in the financing agreement.

Analyze existing financing agreements

Possible breaches of contract

The company must know the contractual basis of the existing financing and must continuously monitor compliance with its obligations. It must examine whether certain contractual provisions have been violated due to the current situation. Depending on the structure of the relevant financing agreement, the following points are particularly relevant:

  • Can the ordinary course of business be maintained?
  • Can the financial covenants (e.g. debt-equity ratio) be complied with?
  • Does the coronavirus situation have a (threatening) material adverse effect (this is usually defined in more detail in the financing agreement) on the company?
  • Are all representations and warranties still true and correct based on current circumstances?
  • Can the current interest payments and the next amortization payment be timely made?
  • Is there a so-called cross default, i.e. is the company in default in another financing transaction?
  • Is there a case of insolvency (e.g. because assets must be written off due to the current situation)?
  • Can the deadlines for the submission of financial information (e.g. annual financial statements with auditors' report) be met?

Possible consequences of breach of contract

Violation of one of these or other provisions in the financing agreement will result in a default or an extraordinary reason for termination. In this case, the lender has the right - but not the obligation - to terminate the agreement immediately or, at a later date after any waiting or cure periods have expired, depending on the contractual terms:

  • to extraordinarily terminate all financing commitments with immediate effect;
  • to call in outstanding loans with immediate effect or within a period set by the lender, including outstanding interest, fees and costs;
  • drawdown of guarantees and realization of collateral.

Financing agreements usually lack a "force majeure" clause whereby the company could in-voke a case of "force majeure" and thus avert any consequences of default or termination. Nor can the company invoke the impossibility of the promised performance according to Art. 119 CO.

Be proactive in contacting creditors

The company concerned would be well advised to proactively contact its major existing lend-ers at an early stage to discuss the extraordinary situation.

Information brokerage

First, the company should comply with the (regular) contractual reporting obligations. This includes the notification of possible violations of contractual provisions.

In addition, the company is to be informed transparently about the current and expected economic situation of the company as well as the financial challenges resulting from the coronavirus situation. As a rule, updated liquidity planning is part of the information package. In order to build trust with the lender, it is advisable to communicate the measures already taken or at least initiated to deal with the situation.

Application to waive compliance with and adjustment of contractual provisions

The company should already formulate concrete discussion points in the sense of justified requests to the lender. These should cover the (temporary) waiver by the lender of certain contractual provisions that have already been breached or are likely to be breached by the company in the near future and the redefinition of certain provisions that take into account the current situation and the presumed short- to medium-term development (amendment, i.e. adjustment of the financing agreement), in particular:

  • waiver by the lender of breaches of contract in order to ensure: no termination of financing commitments; no repayment of outstanding claims of the lender against the company; continued lending; no recourse to guarantees or realization of collateral by lenders; prevention of cross default in other financings;
  • deferral or postponement of amortization payments;
  • adjustment of financial covenants;
  • approval of new (external) financing.

Conditions

Good will on the part of the lenders, especially the house bank of a company, is the order of the day. Many financial institutions are already signalling that they will make offers to their existing customers, for example for temporary deferrals of amortisation payments.

Even in this special situation, however, both parties to the existing financing must be able to live with the changes in the loan conditions. During negotiations, the lender will regularly formulate conditions under which he is prepared to temporarily waive the assertion of his contractual rights and agree to an adjustment of the financing agreement. Such conditions may include:

  • further reporting obligations;
  • prohibition of certain (speculative) financial transactions outside the ordinary course of business;
  • sufficient personnel resources in the management of the company, in particular in the financial area (possible appointment of a crisis management team to support the management and the Board of Directors);
  • execution of measures by the company (e.g. creditor management, cost savings, sale of non-essential assets) and its stakeholders (e.g. capital increase, bridging loan, waiver or subordination of claims);
  • provision of additional collateral;
  • increasing interest margins;
  • additional fees.

Secure new sources of financing

Efforts to maintain existing financing possibilities should go hand in hand with the develop-ment of alternative sources to overcome liquidity problems. The following are worthy of particular consideration:

  • bridging loans guaranteed by the Federal Government and cantons;
  • further government measures for financial support;
  • contributions from other stakeholders such as customers (e.g. sale of consumption credits), creditors (e.g. extension of payment deadlines), shareholders (e.g. non-repayable loans, shareholder loans), employees (e.g. partial wage waiver);
  • insurance cover (e.g. payments under pandemic or epidemic insurance or in the event of a business interruption based on insurance policies with corresponding coverage).

If you have any questions on this topic, the members of our Banking & Finance team will be happy to assist you.

Authors: Adrian Dörig, Stefan Grieder, Seraina Jenny-Tsering

Topics: Capital MarketsPandemicCoronavirusForce MajeureFinancing

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