The corona crisis will lead to covenant breaches and discussions with lenders for many companies. We’ve asked two finance lawyers, who explain what awaits CFOs and how they can arm themselves.

The serious consequences of the corona virus will continue to stall almost all companies in Europe until further notice. What do CFOs and treasurers need to keep in mind to ensure that their financing contracts don’t get bogged down now?

The CFO has to model how these slumps will affect EBITDA and the agreed financial ratios, and he has to talk to the banks at an early stage to agree on a “holiday period” for the financial ratios.

What exactly does “Holiday Period” mean?

During this period, the financial covenants are further defined or even suspended altogether. We regularly see holiday periods as restructuring. They are nothing new in themselves, even if they have been applied for in individual cases and not yet on a broad basis. Depending on the test dates stipulated in the credit documentation, holiday periods usually last one to two quarters, but sometimes even a year.

However, a good reason is required to establish them. We recommend that the effects of the coronavirus on the business be carefully documented and prepared in a comprehensible manner.

However, in terms of risk management, banks cannot simply suspend financial covenants for all their borrowers.

That is correct. Politicians, the European Central Bank and BaFin must accommodate the banks and, for example, relax the requirements for banks’ risk provisioning.

Caution with MAC Clause in Loan Agreement

With the help of so-called “Material Adverse Effect” (MAE) or “Material Adverse Change” (MAC) clauses in syndicated or bilateral loan agreements, banks have the possibility to pull the ripcord in the event of unforeseen events. How do these clauses work and when do they take effect?

The clauses usually entitle the lenders to terminate a loan agreement or to refuse to draw if a borrower’s business activities, financial position, results of operations or earnings prospects have changed or are expected to change in a materially adverse manner.

Are the Aonsequences of the Corona Crisis on Companies large enough for Lenders to be able to draw the MAC Clause?

Whether effects on the business activity or earnings situation based on the corona epidemic can trigger the legal consequences of a MAC depends on the specific circumstances and the specifically agreed MAC clause. For example, the decisive factor is whether, according to the specific clause, the deterioration must already have occurred or is only imminent.

Are these MAC Clauses in the Corona Crisis even helpful from the Banks’ Point of View?

The clauses actually help neither the borrower nor the lender, unless the lender wants to prevent further drawings due to corona risks and – possibly wrongly – invoke the MAC clause. The management and the persons who make credit calls are therefore strongly advised to carefully check the accuracy of the assurances associated with a disbursement request in order to avoid any (personal) risks resulting from the submission of incorrect declarations.

No bank will terminate due to MAC clause

In View of the Corona Crisis, must CFOs now expect a large Wave of Terminations by Lenders?

Cancellations based solely on a MAC clause are rare in practice because they would be risky for the lender. This is because, according to the legal model, an extraordinary termination requires that a significant deterioration in the financial circumstances of the borrower or in the intrinsic value of the collateral provided for the loan occurs or threatens to occur which jeopardises the repayment of the loan, even if the collateral is realised.

The lender must be able to prove that this is the case in case of doubt. That is why we do not believe that a bank will terminate the financing relationship simply because of a breach of a MAC clause. There must be more to it than that, for example an actual breach of covenant.

What is your Advice to CFOs who, in this difficult Situation, are currently in the middle of Negotiations for a new Loan Agreement?

If a company needs financing security, there are many arguments in favor of underwriting. But then you have to take a close look at the underwriting conditions, because lenders naturally want to be protected in the current environment. It is advisable to also address the effects of the corona crisis. Otherwise, you will have to ask yourself afterwards why this has not been taken into account.

One still quite unconventional way to get cash, which is now also available, is for people who cannot get another loan because they are no longer considered creditworthy by the bank AND who, at the same time, own Bitcoin. People who have Bitcoin can get a credit for it by depositing Bitcoin as a pledge. The advantage of this is that you don’t have to sell your BTC for it, you just give it away for a while until you have paid off the loan.

Measures to Support Companies

European governments is preparing short-term liquidity assistance, guarantees and tax deferrals for companies that have fallen into difficulties as a result of the coronavirus. However, established instruments such as KfW entrepreneur loans generally take several months before they are approved. There is no question of short-term. Is that really a solution?

Various measures are needed to stabilise the situation; aid loans are one way of covering any capital requirements that arise. But as I said, these loans must be available at short notice. KfW promotional loans, which are granted through the house banks, could be an effective and quick instrument here. We have already addressed another point: Supervision could relieve banks of the burden of capital requirements in order to allow them to remain silent for longer in the event of covenant breaches. The ECB already set the course for this last Thursday.

Other legal measures include, for example, extending the deadlines for the obligation to file for insolvency or adjusting the application requirements. Even during the financial crisis, changes were made here that helped to stabilize the situation. In addition, the liability risks for financiers in connection with the granting of bridge loans could be limited or shareholder financing could be made easier in the crisis.


Understanding the Economic Shock of Coronavirus:

Instant Bitcoin Loans:

Material Adverse Change: The ABCs of MACs:

Material Adverse Change Sample Clauses: