The concerns over COVID-19 have arguably been the required trigger - against the backdrop of increasing unease ‒ for market participants to take stock and review their financial arrangements.
Lenders and counterparties must review their finance documents regarding protections and/or vulnerabilities; and, where exposed to industries particularly affected by the COVID-19 outbreak, may consider (i) invoking provisions to demand early repayment and/or to preclude further lending; and (ii) whether there is material benefit in doing so. They should also consider what pre-emptive steps they should take to stave off critical defaults.
Lenders will have to reassess credit risk and aim to maximise returns by pursuing restructuring options when available, while reserving rights and avoiding inadvertent waivers. They should avoid wrongful enforcement, but a readiness to act will be imperative.
Sectoral and industry-based issues, for example relating to travel and/or transport, will often frequently stem from: geographical considerations; China's integral role in a business's operations, whether as supplier or consumer; and restrictions on movement of people and goods generally.
In this overview, we outline some considerations, based on experience through our practices in Asia, the Americas and Europe, regarding:
- Liquidity and working capital reviews;
- Directors' duties;
- Relevant contractual terms and covenants;
- Impact on derivatives;
- Standstill/forbearance arrangements.