Material adverse change and material adverse effect in facility agreements
Material adverse change and material adverse effect in facility agreements

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Material adverse change and material adverse effect in facility agreements
  • MAC event of default
  • The MAE definition
  • Acting on a MAC event of default
  • Other uses of MAE and MAC in the facility agreement
  • Brexit and MAC clauses

The concepts of material adverse change (MAC) and material adverse effect (MAE) are used in different but related ways in a typical facility agreement.

  1. Material adverse effect—it is common for a facility agreement to include a definition of material adverse effect. The principal use of the material adverse effect definition is to qualify certain representations, undertakings and events of default

  2. Material adverse change—a material adverse change in the circumstances of the borrower is often included as a separate event of default. This clause is typically negotiated extensively and there are several variations in scope. One common formulation of the MAC event of default is to refer back to the definition of material adverse effect. The borrower is also required to make a representation (which can be a repeating representation) that there has been no material adverse change to its business or financial condition since the date of the last financial statements provided to the lender

The drafting of the definition of material adverse effect will determine both the scope of the qualification to the relevant representations, undertakings and events of default and what will constitute the MAC event of default itself.

This Practice Note covers:

  1. drafting and negotiating a material adverse change event of default and a material adverse effect definition

  2. declaring an event of default on the basis of