06/05/2020
Many registered providers (RPs) have a strong liquidity position, a counter-cyclical business and flexibility to flip the tenure of developments, but are by no means immune to the stresses of the current coronavirus emergency and maintaining cash flow will be vital.
Most RPs will also be unable to access the new government support schemes (see our update on 1 May), so how do you continue to ensure access to funds?
Drawing on existing facilities
In recent years, most RPs have put in place revolving credit facilities to create liquidity for emergency situations. As in the ordinary course of business, there are conditions that need to be satisfied before drawing down the funds and here we look at whether these could prevent access to funds.
There will be the usual corporate documentation (such as board minutes and utilisation requests) as well as a requirement for sufficient available security. Each of these present their own practical challenges at the moment, not least difficulties obtaining valuations and delays with property due diligence searches. Lenders seem to be exercising varying degrees of flexibility in terms of accepting desktop valuations and search indemnity insurance and identifying these issues early on is crucial.
In addition lenders also require certain representations to be repeated which will usually include a statement that there has been no material adverse change since the date of the latest (or original) financial statements, and also that there is no other event that would constitute a default or termination event under any other contract that might have a Material Adverse Effect (MAE).
Normally, these statements should not be problematic for a borrower to provide. Currently, however, it is more than likely that there has been a significant change in the business, although whether it can be considered a material adverse change will depend on the facts and the drafting of the clause. Equally it is possible that there has been a default or termination event under an unrelated non-financial agreement - for example, a construction contract or repair and maintenance contract.
In all cases the wording of the clause (such as whether it is subjective and the level of certainty required) will be crucial in determining whether there has been an MAE and whether the confirmations can be given.
New loans
For some borrowers, there will be a need to refinance existing facilities, or indeed an opportunity to obtain new funding, and the same kind of considerations will apply in relation to the representations required to be made when entering into new documentation. Analysis of the immediate and longer term business conditions will inform negotiation of these provisions.
Whilst you may expect there to be some sort of specific COVID-19 clause, this is not something we have seen in the market, however the current situation has sharpened the focus on the wording of certain clauses, such as material adverse change clauses and MAE provisions as well as cross-default clauses. There may be tighter controls or higher pricing and it is critically important to look carefully at the drawdown conditions to ensure any increase in liquidity is truly available.
Need more information or advice?
The banking and finance team at Bevan Brittan can help interpret MAE clauses and negotiate new facilities or refinancing arrangements.
For further support relating to the impact of COVID-19, please view our COVID-19 Advisory Service page.
