COVID-19: The Impact on Corporates and Debt Documentation
February 2, 2021
The coronavirus pandemic posed a considerable challenge to corporate borrowers seeking to preserve liquidity and access additional funds in the face of falling revenues in 2020.
Bond issuances by large corporates soared whereas, in comparison, syndicated loan transactions trailed for most of the year in a constrained market. This year also saw an up-tick in hybrid investments, including in connection with the acquisition of the ThyssenKrupp elevator business in early 2020. Given their more bespoke terms and lack of homogenization comparative to other investments, the adaptability of hybrid instruments may see them proliferate post-COVID-19.[1] Following record debt issuances in the first half of the year, many companies have focused on repaying, refinancing or reducing debt (including through liability management transactions) scheduled to mature in the short to medium term.
As the year progressed, borrowers facing covenant compliance issues sought consent requests proposing covenant amendments to address liquidity concerns and the impact of the pandemic on their business. These consents come in various forms such as the suspension or loosening of financial covenants for a defined holiday period, the addition of carve-outs under the debt covenant and the addition of incremental debt capacity to permit borrowers to raise additional financing and amending the “Material Adverse Effect” definition to exclude the impact of the pandemic. While lenders may have provided debtors with a temporary reprieve, the quid-pro-quo included the imposition of additional obligations such as the introduction of liquidity covenants and additional financial reporting covenants.
Noteworthy terms that came to market in 2020 included broad addbacks to consolidated net income or EBITDA for non-recurring, exceptional, one-off and extraordinary costs and losses resulting from COVID-19, uncapped pro forma adjustments to the calculation of EBITDA, more permissive ratio calculations, increased room in baskets for the incurrence of additional facilities or permitted alternative debt and increasing permitted investments capacity. We noted in a previous update[2] that, in the past, lenders have been extremely reluctant to exercise their rights in relation to MAE events of default and that their approach was unlikely to change, even in the face of COVID-19 related disruptions. As large UK banks remained well capitalised and supported by government policy in 2020, this translated into a willingness to extend loan waivers and, indeed, a reluctance to call defaults, much less on MACs.[3] There were few reported cases in 2020 relating to enforcement of MAE clauses, and the High Court judgment in Travelport Ltd and others v Wex Inc [2020] EWHC 2670 (which did not determine whether a MAE had in fact arisen) reiterated the legal and factual complexities involved in successfully doing so.
[1] See our alert memorandum: Neither One Thing Nor the Other: Hybrid Investments.
[2] See our alert memorandum: COVID-19 – Liquidity and Other Considerations for Borrowers.