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2 April, 2020
In terms of market sentiment, there is no denying that COVID-19 has impacted the deal flow for loan transactions, particularly for borrowers in China. A number of deals have been put on hold, including the planned syndication for a loan for a REIT with a portfolio of Chinese properties (which has been pushed back indefinitely).
Given the logistical difficulties of running road shows and syndication processes, it is expected that borrowers will consider club deals with relationship banks as an alternative to
a large syndication.
Sourcing new deals can be challenging, given the impossibility of travelling to face to face meetings in mainland China and the rest of the region, although this is proving less of an issue in the majority of cases as borrowers are often well known names.
In general, where deals have been completed, it has required flexibility on the behalf of counterparties and lawyers alike. We have experienced this first hand, with many of our lawyers adopting agile working arrangements in response to the current situation. From a practical standpoint, we have found that constant communication within our teams and with our clients, slight adjustments in working habits, and sharing of agile working tips and best practice have allowed our lawyers to continue to deliver a seamless service to our clients and execute loan transactions in a timely manner.
The impact of the virus on existing deals, however, may be significant. For example, a number of IPOs have been postponed, which may impact potential exits, and if capital raising on the debt and equity capital markets proves challenging, refinancing options may also need to be adjusted.
Finally, the impact of the virus’ consequences on the underlying business of any borrower will, of course, start to be felt in the accounts and ratios.
Below we have outlined some practical guidance for those who have seen their markets for loan transactions disrupted by the COVID-19 outbreak.
01 – Impact of COVID-19 on deal origination and syndication
The practical impact of the restrictions on movement and on “in office” working in the mainland and elsewhere has had a number of consequences.
In considering potential new financings, lenders have found it challenging to access due diligence materials and KYC information.
- the borrower’s offices are temporarily closed
- key personnel are working from home/remotely
- travel restrictions are in place making
- face-to-face meetings and site visits difficult
- access to local regulators is restrictedaccess to financial information from the borrower and its auditors is delayed
Workarounds include:
- Banks and borrowers have utilised conference calls rather than running formal road shows – press reports show that at least three Asian borrowers have used calls rather than a road show – such as China State owned Beijing Construction Engineering Group which held a conference call on 7 February for its $100m three year loan and Vietnam Technological & Commercia Joint Stock Bank which did the same on 2 March for its US$300m three year loan.
- Other borrowers have used webinars as a means of discussing key terms for potential deals – for example, Trans Retail Indonesia (a unit of Indonesian Trans Corp) held a webinar in February rather than a bank meeting in order to pitch for a new US$740m facility. It was reported that over 150 bankers participated in the webinar.
- a need for closer liaison with local counsel for the latest “on the ground” report
02 – Specific considerations for existing deals
Given market events, borrowers may have cashflow issues either as a result of their own operations or due to default by their suppliers or customers This could lead to default under loan agreements, including:
- failure to satisfy any outstanding conditions subsequent
- breach of information undertakings – delays in production of financial statements and annual reports
- payment default – inability to pay scheduled amortisation, interest or other payments
- breach of financial covenants
- cross default
- breach of any other representation or undertaking triggering the MAE event of default
Potential resolutions
Regulators are focusing on assistance to borrowers under financial stress from COVID-19:
- In Hong Kong, the HKMA sent a letter to AIs on 6 February 2020 – acknowledging that some AIs are planning temporary measures to help their customers including: moratorium on principal payments for residential and commercial mortgages; and
- restructuring repayment schedules for corporate loans
- “A proactive response by the banking industry will help mitigate the financial consequence of the outbreak.” – HKMA
The HKMA has requested:
- AIs to adopt a “sympathetic stance” in dealing with customers facing financial stress due to the virus; and
- consider requests from borrowers for temporary relief arrangements favourably
Explore the map here to view more government relief programmes across jurisdictions in Asia
Government relief programmes
In addition to requests from regulators, governments in a number of countries have announced relief programmes or have cut interest rates to assist local businesses .
Select a jurisdiction on the map to explore in more detail.
03 – Consequences of financial distress
Explore the consequences of financial distress by opening the links in this section:
Lenders vs Borrowers considerations
Lenders consideration – drawstop/acceleration: MAC
Borrower considerations – avoid performance: Force Majeure
Borrower considerations – avoid performance: Frustration
Key principles: Force Majeure and Frustration
Other requests by Borrower – waivers and amendments
04 – Practical issues
Explore some of the practical issues in the current climate. Physical signing and closing of loan transactions is rare these days however if one is contemplated then workarounds will need to be considered. Explore the links in this section for guidance:
Registration and filing deadlines
Registration and filing deadlines – “Business Day” definition
Registration and filing methods
For further information, please contact:
Nathalie Hobbs, Partner, Linklaters
nathalie.hobbs@linklaters.com
