IFR 03.21.2020

4 International Financing Review March 21 2020

Top news

Lenders scour loan docs for ways

to avoid commitments

„ Loans Banks consider exercising MAC clauses, but they will do so with care - if at all

BY DANIELA GUZMAN, AARON

WEINMAN, ALASDAIR REILLY,

KRISTEN HAUNSS

Lenders to some of the world’s

largest companies are working

through debt agreements to see

if they can cite the fast-spreading

coronavirus as a reason to avoid

funding previously committed

lNANCINGS

Banks, sponsors and

corporations have been asking

their legal counsel if lenders are

permitted to drop out of

COMMITTEDûlNANCINGSûORûNOTû

fund existing revolving lines of

credit, because the fallout from

the global pandemic constitutes

a so-called material adverse

change.

Lenders have also been

looking at solvency

representation language in

agreements to see if banks can

step away from commitments

because current market

conditions have led to a

deterioration in a company’s

lNANCIALûHEALTH

Concerns about the fast-

spreading virus have sent

markets into a frenzy, with the

Dow Jones Industrial Average

falling more than 30% between

the start of February and

Wednesday, and the LPC 100, a

cohort of the 100 most liquid US

loans, dropping by more than

12% in the last six weeks to 86.

cents on the dollar on Tuesday,

the lowest level since June 2009.

“It is reasonable to expect that

as this pandemic continues and

borrowers request large drawings

under committed credit lines and

acquisitions are scheduled to

close, lenders will look closely as

to whether funding conditions

AREûSATISlEDvûSAIDû3ETHû*ACOBSONû

GLOBALûHEADûOFûLAWûlRMû3KADDENû

Arps, Slate, Meagher & Flom’s

banking group.

Companies have drawn on

their revolvers to preserve

lNANCIALûmEXIBILITYûAûMOVEû

many blue-chip and leveraged

borrowers made during the

lNANCIALûCRISISûTOûENSUREûACCESSû

to liquidity.

On Thursday, FORD MOTOR said

it would draw down US$15.4bn

from two of its revolving credit

lines and suspend a dividend

payment, joining several

businesses that are burning cash

due to the virus.

The carmaker joins AIR CANADA,

EXPEDIA and WYNN RESORTS, among

others, that have drawn roughly

US$22.7bn in bank debt

collectively in the past week.

Companies are also taking on

new bank debt to increase

lNANCIALûmEXIBILITYûINCLUDINGû

JETBLUE AIRWAYS and AMERICAN

AIRLINES, which both signed

US$1bn 364-day credit lines last

week.

Borrowers pay for revolving

lines of credit, even when not

drawn, to have the ability to

access cash when they need it.

The credit lines can be used to

fund working capital or as a

stopgap during a supply chain

disruption, said Victoria

)VASHINAûAûlNANCEûPROFESSORûATû

Harvard Business School.

“I can see how a bank would

want some optionality on being

able to prevent a run on

revolving credit lines, but banks

are there precisely to help

companies weather liquidity

shocks,” she said. “Banks

funding revolving lines is an

important part of what they do

for an economy.”

MAC ATTACK

Lenders have been looking at

their documents to see how

SPECIlCûCLAUSESûFORûEACHûRELEVANTû

borrower are drafted for both

COMMITTEDûlNANCINGSûANDû

existing revolving lines of credit,

said Jake Mincemoyer, head of

LAWûlRMû7HITEûû#ASESû

Americas banking unit.

Lenders want to understand

their options and determine

whether a MAC clause could be

triggered if a lender is

uncomfortable funding a

drawdown request on a revolver

due to current market

conditions.

But lenders will also need to

be careful when invoking a MAC

clause on the back of the

pandemic because, if it is

wrongly called, they risk

massive reputational damage

and the paying out of substantial

damages as well as a potential

UNDERMININGûOFûCONlDENCEûINû

the loan market.

“Calling a MAC is a very

strong statement to make and

one that carries with it a lot of

responsibility of a ripple effect it

can have on a company with

other creditors and operations. It

is something lenders are

cautious about because they

want to get it right,” said

Jennifer Daly, a partner at law

lRMû+INGûû3PALDING

“Shy of calling a MAC,

however, lenders can use the

question of whether a MAC may

exist as an opportunity to start a

broader conversation around

tightening terms in credit

documents.”

Lenders are also looking at

document language regarding

the health of a company.

As a condition of closing a

loan agreement, a borrower is

required to provide a solvency

CERTIlCATEûWHICHûGENERALLYû

states that after the transaction,

THEûCOMPANYûWILLûHAVEûSUFlCIENTû

capital to pay its debts.

A similar solvency condition

can exist for companies seeking

to draw down on their revolving

lines of credit, said Jessica Reiss,

head of leveraged loan research

at Covenant Review. A breach of

a solvency representation and

warranty could result in a

default.

“A solvency condition is

important because lenders

shouldn’t be obligated to lend if

a company at day one knows it

Source: IFR, LPC won’t be able to repay its loan,”

US$bn

0

2

4

6

8

10

12

14

16

Hilton Worldwide

Aramark

Wynn Resorts

L Brands

Micron Tech

CarnivalVentasMarriott

AerCapHeinz

AB InBev

Ford

PANDEMIC SPOOKS COMPANIES TO TAP CREDITLINES

“It is reasonable to

expect that as this

pandemic continues

and borrowers request

large drawings under

committed credit lines

and acquisitions are

scheduled to close,

lenders will look closely

as to whether funding

conditions are satisfied”

4 IFR Top news 2325 .p 2 - 12 .indd 4 20 / 03 / 2020 19 : 08 : 55