Member Article

The business financing sector is among those that could suffer the greatest impact due to the economic crisis that is expected to be the inevitable result of the global COVID-19 pandemic. In fact, the paralysis of economic activities will undoubtedly have a negative impact on the liquidity of companies that have to make regular payments under financing agreements.

These liquidity problems will seriously harm the ability of companies to meet their obligations on time. This is likely to lead to breaches of con - tract that could be grounds for terminating the agreements and for the acceleration of any out - standing obligations, which would have an even more serious effect on the economic and financial situations of companies.

The current situation is an exceptional one that is not always adequately addressed in the financing agreements themselves. Therefore, companies and financial institutions should analyse the word - ing of their agreements so they are in a better position to plan the actions to deal with any issues that arise under them.

Issues to be considered by debtors

Information obligations:

Debtors must analyse the information obliga - tions contained in the financing agreements, in particular, the ones that oblige them to inform the financial institutions of imminent contrac - tual breaches and, in particular, in what related to breaches of pecuniary obligations. Although not expressly provided for in the agreement, it is recommended that debtors take a proactive approach in anticipating any potential breach in order to comply the ancillary duty of information arising from good faith principles;

Breach of financial covenants:

The presumed liquidity problems and loss of turnover that will be felt by debtors may lead to a breach of the financial ratios set out in the financ - ing agreements. As a result, companies should look at solutions that would make it easier to fulfil their obligations (for example, capital injections), in light of the cure periods provided for in the agreement and in order to demonstrate that the company has a plan to restore the levels of the financial ratios agreed in the short and medium term. On this point, it is also important not to neglect the potential impact of any disruption of the work of auditors and the operations of stock markets, which will make it more difficult to calculate these ratios;

The impact of other events of default:

Financing agreements commonly list a wide range of events of default, other than breach of pecuniary obligations, which could lead to the anticipation of obligations. Therefore, besides the situations involving a breach of financial covenants, provision is made for cases such as a cessation of activity, material adverse effect on the economic activity of the debtor, violation of laws or regulations (note the impact of legis - lative measures taken in the context of a state of emergency), submission of petitions for the insolvency of the debtor, or the commencement of enforcement actions against the debtor;

Cross-default:

The early maturity of obligations under the financ - ing agreement will not only have an impact on the financing agreement itself. It may also cause other financial institutions to declare the acceleration of their agreements. They will do so to ensure that they are in the same position to the other creditors and that they do not lose out because they have taken a more passive or understand - ing approach to the difficulties of debtors. This means the potential impact of default should not be considered in isolation, but rather in light of its potential impact on other agreements;

Requests for waiver / cure periods:

Debtors must also check whether there are any cure periods that apply in the event of default, without prejudice to the information duties mentioned above. If these periods are not sufficient to remedy the default and prevent the early maturity of the obligations, debtors should once again actively submit requests for waivers due to the current situation;

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