Credit financing in the time of COVID - basic impacts on financing contracts

General questions with respect to the impact of extraordinary measures on contractual relations have been mentioned HERE, in relation to financing contracts there are certain specifics, the basic outline of which is set forth in this note. In addition to arrangements between suppliers and customers, financing contracts are another cornerstone of any business and private life, so due attention should be paid to them in times of emergency measures so that the particular entities have not lost access to financing of their business and other activities.

As with any other contract, it is necessary, first of all, to review the respective rights and obligations of the parties so that each party can assess the impact of the current situation on the relationship and position of the party concerned. As some financing contracts refer to other documents (in particular the general terms and conditions), it is appropriate to revise not only the financing contracts themselves, but also the related documents.

In view of the usual structure of a financing agreement, in addition to direct payment obligations to the creditor (or cross-default if the debtor does pay debts of other creditors), the current situation may have an impact in particular on the following provisions:

Representations of the debtor. Each debtor provides, in addition to basic representations in relation to itself (or other persons in the same group as the debtor), representations in particular to its business activities (effectiveness of business contracts, solvency of customers) or payments obligations (to both suppliers and other financial institutions or the state and health insurance companies).

Financial covenants. These are a direct reflection of the financial situation of the borrower or its assets, in particular the debt-to-profit ratio, loan to value ratio and other financial covenants with respect to the specific type of financing.

Information obligations. A common part of financing contracts is the obligation to inform creditors of facts that may have a negative impact on business and debt repayment. The general impact seems obvious, but the impact on a particular sector and a particular entity may vary significantly, so it is appropriate to describe for the lender the specific situation, the assumption of impacts, the measures being taken and other relevant information.

General obligations. As in the case of representations, obligations are connected, inter alia, to business activities, whether in relation to the debtor or members of its group, and some of them may be difficult to comply with, such as the effectiveness of significant customer contracts or the percentage of retail space leased.

Material adverse effect. This is a general and often separate category of breach of a financing contract where despite the debt being repaid and no obligations having been breached so far, the so-called substantial adverse effect, which has a significant negative impact on income, business, property, condition (financial or otherwise) or prospects, has occurred.

Breach of the provisions of the contract (or a material adverse effect) usually allows the creditor to cancel, inter alia, the commitment to provide additional funds or request repayment of the loan, which may be more serious for the borrower than a default interest on any amounts due.

It is equally important to think of other practical issues such as:

Time periods and limitations. Each contract sets deadlines for the delivery of various documents and information, whether on a regular or ad hoc basis. The parties should take into account not only their direct ability to provide such documents and information, but also verify ability to deliver these by third parties (typically financial statements or audits).

Revolving (and overdraft) loans. Any working capital financing provided in the form of revolving or similar loans that may be borrowed or re-borrowed repeatedly should be revised in light of the creditor's ability to cancel commitments to do so, regardless of other circumstances (or conditions under which this may happen).

From a practical point of view, debtors can be advised to come in contact with their creditors as soon as possible if it is already clear that their ability to repay could be impaired (not necessarily only at the next repayment but also in the longer term). Conversely, creditors should assess whether their (particularly significant) debtors are able to fulfill their obligations and, if necessary, specifically question those debtors.

Deferral of loan repayments for all debtors

At the government level, suspension of loan repayments for about 6 months is currently under consideration. We will inform you of the action as soon as it is adopted.