Assessing the impact of coronavirus (COVID-19) on leveraged finance financial covenants

Assessing the impact of coronavirus (COVID-19) on leveraged finance financial covenants

Jeremy Duffy and Richard Lloyd, partners at White & Case, discuss the impact the coronavirus (COVID-19) pandemic on financial undertaking compliance in the leveraged finance market and what actions borrowers and sponsors can take to avoid breaching their financial undertakings during this time.

What impact has the coronavirus crisis had on financial undertaking compliance in the leveraged finance market so far?

It is anticipated that earnings before interest, taxes, depreciation, and amortization (EBITDA) will have reduced significantly from forecasted levels for the majority of borrowers and as a result, certain borrowers with financial undertakings based on leverage have begun to seek covenant holidays, resets or waivers.

This is more of a prevalent issue in the mid-market where many borrowers are subject to, at a minimum, a leverage maintenance undertaking, which is tested quarterly. Outside of such mid-market deals, many leveraged finance credit facilities are cov-lite, which means that there is no regular testing of a financial maintenance undertaking. Nonetheless, many borrowers have become reliant on their RCF in order to maintain liquidity, which creates a greater risk of triggering the threshold of RCF drawings at which a springing leverage financial undertaking would be tested under such cov-lite documentation.

Do you see an increase in defaults coming up? If so, when?

As borrowers are expected to report on their financial undertaking compliance at the end of Q2 of 2020, we anticipate that there will be an increase in those seeking holidays, waivers and amendments to avoid defaults. For credits that have already had difficulty with financial covenant testing, lenders are generally cooperating with borrowers in order to accommodate such requests, often agreeing to testing holidays and to waive existing defaults and avoid future defaults for a period of time, in exchange for borrower concessions.

Notwithstanding the above, we

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About the author:

Miranda is a solicitor specialising in leveraged and acquisition finance. She trained at Hogan Lovells International LLP and qualified into the international banking and finance team. During her time at Hogan Lovells she worked on a variety of domestic and cross-border transactions, acting for both borrowers and lenders. She also experienced secondments to Barclays Bank PLC and Kaupthing Bank hf.