Q&As

What are the implications of coronavirus (COVID-19) for MAC clauses in facility agreements?

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Published on LexisPSL on 02/04/2020

The following Banking & Finance Q&A provides comprehensive and up to date legal information covering:

  • What are the implications of coronavirus (COVID-19) for MAC clauses in facility agreements?
  • Why are material adverse change (MAC) clauses in the spotlight?
  • How are MAC clauses typically drafted?
  • What guidance does the case law provide?
  • Contractual interpretation
  • Interpretation of material adverse effect clauses
  • Triggering material adverse effect clauses
  • Could the coronavirus (COVID-19) pandemic trigger the MAC event of default?

Why are material adverse change (MAC) clauses in the spotlight?

The coronavirus (COVID-19) outbreak has already caused some businesses to fail and financial distress to many others. Governments and regulators are urging lenders to be supportive of businesses, especially those that are, the outbreak aside, financially sound. However, lenders will still be looking to review their finance documentation and ascertain their rights at an early stage.

Facility agreements typically include a list of events of default. Breach of any of these by the borrower will give the lender(s) the right to exercise certain rights under the facilities agreement, such as accelerating the loan (ie demanding early repayment) or enforcing security. An event of default can also have other consequences under the finance documentation, such as:

  1. giving the lender the right not to lend any further amounts under the facility agreement (known as a drawstop), and

  2. enabling the lender to transfer commitments without needing the consent of the borrower

Most importantly, even where the lender doesn’t intend to exercise any of its contractual rights following an event of default, it can use the threat of acceleration or enforcement to start discussions with the borrower, request additional information and closely monitor how the business is progressing.

The list of events of default will typically include failure to make payments under the facility agreement when due, insolvency and breach of undertaking.

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