Impact on financing arrangements

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Scenario planning is key

Financiers may be looking to accelerate or renegotiate existing financing arrangements or drag their feet in discretionary and capital expenditure financing. Focus on issue-specific representations and undertakings, interim operating covenants (including any obligation to act in the ordinary course of business and consistent with past practice) and Material Adverse Change clauses.

Focus on issue specific trigger points

Financiers may look to renegotiate or accelerate financing arrangements or drag their feet in yet-to-close M&A deals, discretionary financing and capital expenditure financing. Financiers could second-guess compliance with every condition precedent, representation and undertaking, request additional confirmations in certificates, etc. In particular, we expect that there will be a continued focus on issue specific conditions precedent, representations and undertakings, interim operating covenants (including any obligation to act in the ordinary course of business and consistent with past practice) and Material Adverse Change clauses. Mapping related risks and opportunities on short notice, and preparing for various scenarios (i.e. having a plan A, B and C) ensures preparedness for any discussions.

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Discussions with financiers may need to be started

Financiers may look to renegotiate or accelerate financing arrangements or drag their feet in yet-to-close M&A deals, uncommitted financing and capital expenditure financing. Financiers could second-guess compliance with every condition precedent, representation and undertaking, request additional confirmations in certificates, etc. In particular, we expect that there will be a continued focus on issue specific conditions precedent, representations and undertakings, interim operating covenants (including any obligation to act in the ordinary course of business and consistent with past practice) and Material Adverse Change clauses.

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Publicly listed bonds

As for publicly-listed bonds, they typically require a credit rating. If the rating has not yet been obtained, the ratings processes may be put on hold or progress very slow. However, if a credit rating has already been obtained and is not up for renewal, we have not seen the rating agencies proactively reaching out (yet), although this may change, especially where particular issuers are more severely hit by macroeconomic changes than other market participants.

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Acquisition financing

With respect to acquisition financing facilities, lenders may occasionally try to pressure the purchaser to terminate the SPA, or otherwise pull out, on the basis that a draw-down of funds to close the transaction would be unpermitted use of the facilities, or some comparable argument. If the company does want to seek a way out, it is key to stay in control of the narrative. Communication with the financier, the seller and the target company has to be coordinated from the new perspective. Several aspects, that were not in play before, are now of mounting importance.

One of the main things to keep in mind is to prevent giving cause to liability claims by the seller or target towards the company (or its Board). Furthermore, the company has to prevent giving rise to the allegation that it is in default itself (creditor's default) and can therefore not rely on any default from the seller-side. To stay in the driver's seat, and control the narrative, requires advanced preparation prior to any communication with the seller or target on the topic of halting the deal.

It is key to face these potential risks and opportunities head on. Mapping related risks and opportunities on short notice, and preparing for various scenarios (i.e. having a plan A, B and C) together with financial and legal advisers ensures preparedness for any discussions. This allows the Board to show the company's counterparties, financiers and the buy- or sell-side that the Board is in control.

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Lisa de Boer

Senior Associate