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Impact Coronavirus (COVID-19) on financing and liquidity

15 March 2020
Banking & Finance - Corona/COVID-19 Helpdesk

Developments in the Netherlands and the rest of the world with regard to COVID-19, the Coronavirus, are currently following one another quickly. The impact of the Coronavirus on the national and international economy is becoming increasingly visible. People work at home, events are canceled and everyone is advised to stay at home. For many companies, including a large number of SMEs, the financial impact of the Coronavirus is enormous. For example: hotels, restaurants and the travel industry.

In this newsflash we highlight some relevant governmental schemes (overheidsregelingen) and measures that could play an important role in limiting the impact of the Coronavirus on the financing and liquidity position of companies. We also address some points of attention regarding the impact of the Coronavirus on existing financing arrangements (and documentation).

Governmental schemes

The Dutch government has announced that measures will be taken to support companies, regardless of their size, in this (financially) challenging period. By letter of March 12, 2020, the Ministry of Economic Affairs and Climate (https://www.rijksoverheid.nl/documenten/kameronderdelen/2020/03/12/kamerbrief-over-economische- measures-met-betrekking-tot-het -coronavirus) announced that various actions are being considered. In the context of financing and liquidity, the extension of the existing guarantee for sme loans scheme (BMKB) and a number of tax measures, including the temporary collection of VAT payments, are particularly important. These specific measures will have to be further developed in the coming days / weeks. In particular, it is important to consider which entities can benefit from the aforementioned facilities.

For example, the BMKB scheme can only be used by SMEs (maximum 250 employees and an annual turnover of up to EUR 50m or a total balance sheet of EUR 43m). Given the fact that companies that do not meet the above criteria are also affected by the effects of the Coronavirus, it would be good to extend the scope of the BMKB facility, or to introduce a similar facility for companies that are too large to qualify as a SME.

As an alternative to the BMKB scheme, companies could consider (in consultation with their lenders) whether the Guarantee Enterprise Finance facility  (GO financing) could offer a solution. Information about the Go Financing can be found on the website of the RVO (https://www.rvo.nl/subsidie-en-fancieringswijzer/ Garantie-ondernemingsfanciering-go/deelnemen-als-ondernemer).

In the short term it is expected that additional and concrete measures and guidelines will be announced by European supervisors. The first measures have already been announced. The European Banking Authority (EBA) has announced that the stress test for banks (test whether institution meets capital requirements) will be postponed until 2021. This offers European banks the opportunity (and scope) to focus on the continuity of their lending activities and allow them to take a more flexible approach towards certain risks. The EBA calls on local supervisors (for the Netherlands this will be the Dutch Central Bank (De Nederlandsche Bank)) to exercise as much flexibility as possible in the exercise of its supervision.

Dutch Banking Association (Nederlandse Vereniging van Banken)

In line with the measures and guidelines issued by the EBA, the Dutch Banking Association has also announced that it advises its members to adopt a flexible position. Banks are called upon to assist their customers wherever possible and to assist them in taking adequate measures to get through this difficult period.

Existing finance arrangements

The Coronavirus is also likely to have an impact on existing financing arrangements and the related documentation. Both lenders and borrowers are encouraged to make an inventory of the impact of the Coronavirus on, for example, the repayment capacity and the agreed covenants. In addition, it may be necessary to look at collateral structures and the option to request or provide additional collateral.

Credit documentation is often based on the Loan Market Association (LMA) standards. These are standard agreements that are used internationally in finance transactions. Credit agreements that are not drawn up on the basis of the LMA standards nevertheless often contain corresponding conditions.

Credit agreements contain a number of provisions that provide the lender with an extensive power to cancel a credit agreement, limit lending under such an agreement or request repayment of the outstanding amount. The main provisions in this regard are:

  • Various covenants: credit agreements contain a large number of (financial) covenants that the borrower must comply with, e.g. covenants with regard to cash flow and interest coverage. If these covenants are no longer complied with, a situation arises in which the borrower is in default. Such a default will have to be repaired. In other words, the borrower will have to comply with the agreed covenants within a limited period. The current economic situation makes it unlikely that defaults can be repaired (quickly). Failure to repair a default can lead to termination of a credit agreement, which normally means that the outstanding amounts under such an agreement become due and payable.
  • Material Adverse Effect: a general provision that gives the lender plenty of room to argue that an event may have a negative effect on, for example, the borrower’s ability to meet borrower’s obligations under the credit agreement. This provision allows the lender to terminate the credit agreement and claim the outstanding credit. In addition, creditors who rely on such a clause could start to enforce collateral provided to them (pledges and mortgage rights). The negative effect can take various forms and may concern the company itself, third parties involved in the company and the market or economy as a whole.

For all parties to a credit agreement it is important to determine whether there is a breach of (certain) covenants or the existence of a material adverse effect (most credit agreement contain an information undertaking on the basis of which the borrower is obliged to inform the lender of any default (failure to comply with this obligation also leads to a default under the credit agreement)).  Should this be the case, then the consequences should be considered (possibly also for other facilities and financing structures such as, for example, cash pool arrangements (based on cross default provisions)).

In this newsflash we do not address any duty of care aspects that must be taken into account by lenders in case of cancellation of credit agreements and the collection of any outstanding amounts. Please note, for reasons of reasonableness and fairness (redelijkheid en billijkheid), a lender may be restricted in exercising its rights to terminate a credit agreement and to request for repayment, or enforcement of security rights.

Under the current situation we are of the opinion that both the lender and the borrower benefit from a constructive dialogue in order to adapt tailor made solutions for existing finance arrangements. This can be done, for example, by temporarily extending covenants, temporarily postponing repayment obligations (in the event of a liquidity shortage) and reviewing and strengthening collateral structures.

The banking & finance team of Ploum can advise you on how you and your organization can make use of the various available governmental schemes. In addition, we can guide and assist you in identifying the consequences the Coronavirus may have for your existing finance arrangements and the related next steps, e.g. adjusting your existing credit facilities, entering into a bridge financing or refinancing. If needed we can assist you in conversations with your existing financiers.

We will keep you regularly informed of further developments that may be relevant in the context of financing and liquidity.

For questions or information, please contact Matthijs Bolkenstein or Lucas Lustermans

Matthijs Bolkenstein                                  Lucas Lustermans

+31 6 4663 0866                                         +31 6 1985 0096

m.bolkenstein@ploum.nl                         l.lustermans@ploum.nl