IFR 03.21.2020

International Financing Review March 21 2020 5

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she said. “Why would lenders

give a company money under

those circumstances?”

LITTLE PRECEDENCE

Although MAC clauses are

routinely included in loan

agreements, in theory allowing

lenders to cancel deals and

renegotiate terms, they are

rarely relied on as it is often

unclear what would constitute

ANûADVERSEûCHANGEûSIGNIlCANTû

enough to activate the clause.

As a result, there is relatively

little case history of MAC

clauses in English law and while

there is some guidance from the

US and regulatory bodies this is

not clear cut. Courts and

regulatory bodies have regularly

found against the party

claiming a MAC has occurred.

Whether the coronavirus

outbreak of itself constitutes a

MAC event is questionable.

Previous major adverse global

political and economic events,

including the 2008 global

lNANCIALûCRISISûDIDûNOTûTRIGGERûAû

huge wave of MAC clause

activation.

Meanwhile, research suggests

there are no litigated examples

in the UK or the US of MAC

provisions being invoked as a

result of epidemic or pandemic

events such as the 2003 SARS

EPIDEMICûTHEûûSWINEûmUû

pandemic or various outbreaks

of MERS starting in 2012, law

lRMû!SHURSTûSAIDûINûAûREPORT

h'LOBALLYûSIGNIlCANTûEVENTSû

are relatively rare and examples

of MAC provisions being called

upon in that setting are rarer

still,” Ashurst said.

ECHOES OF 2008

The decision to borrow typically

UNDRAWNûlNANCINGSûHASûECHOESû

OFûTHEûûlNANCIALûCRISISûWHENû

companies drew down on

unfunded credit lines, taking

the banks by surprise, and

PUTTINGûAûSIGNIlCANTûSTRAINûONû

their deposits.

In addition, lenders’ liquidity

and the quality of the assets

they are required to hold against

the capital they loan are also

under scrutiny.

“Beyond the underlying stress

that is driving these draws,

questions have been raised

about banks’ ability to meet the

funding demands and the

implications for capital ratios

and asset quality,” Barclays

analysts wrote in a research

report.

Most corporates borrowing

from these credit lines are

investment-grade, which should

limit the immediate impact on

asset quality, according to the

Barclays report.

“Requirements are high, and

drawdowns have been steady but

not overwhelming,” a banker said.

So far lenders are responding

well to the requests, though

banks with more limited US

dollar deposits could face

SIGNIlCANTûCHALLENGESûIFû

companies start asking for new

money in addition to borrowing

under their existing loans.

BACKSTOPPING LINES

Companies use revolving credit

FACILITIESûASûBACKSTOPûlNANCINGûINû

case short-term commercial paper

lines fail to roll over, and borrowers

can draw down, repay, and re-

borrow these loans at will. For the

most part, these facilities pay low

rates and remain undrawn.

“I don’t think this is a bank

liquidity issue, I don’t see any bank

in trouble, and the Fed has opened

up a discount window for the

banks,” said a second loan banker.

Moody’s also said the world’s

biggest banks could cope with

companies’ need to borrow

more cash. But on Wednesday, it

warned in a report that lenders

were subject to liquidity

pressures, particularly at a time

when new bond and loan

issuance had dropped.

“This is a shock to the system

• it’s all happening in two
  weeks, whereas the recession
  took more than a year to
  happen,” said the second
  banker. “If this crisis continues,
  there could be more exposure.”

PRICING UP

There is roughly US$1.2trn

worth of untapped revolving

credit lines for issuers in the

Bloomberg Barclays’ Corporate

Index, with approximately

US$800bn of this amount

concentrated on the Triple B

rung of the credit spectrum, the

Barclays report showed. Sub-

investment grade borrowers

have about US$500bn in

committed revolving credit lines.

If nothing else, as companies’

demand for liquidity grows,

banks could start charging more

for new commitments to lend.

“Banks can’t charge more on

existing credit lines because

borrowers will ask for

contractual pricing, but if they

ask for new money, I do expect

the banks to charge more,” the

second banker said. “I do expect

the world to have higher pricing

for a while.” „

“Beyond the

underlying stress that

is driving these draws,

questions have been

raised about banks’

ability to meet the

funding demands and

the implications for

capital ratios and asset

quality”

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