Lenders and borrowers – new pressures in unprecedented times

Our team: Luke Morris

In these unprecedented times, all loan deals are being stress tested. Both borrowers and lenders alike have their own issues from meeting payment obligations and satisfying financial covenants to liquidity ratios and revaluing portfolios.

From a borrower’s perspective, generally speaking force majeure clauses don’t appear in debt finance documents. If they don’t then under English law a borrower can’t rely on this to be relieved of their obligations. Similarly, the legal concept of frustration, where an unforeseen event occurs which is the fault of neither party, would not in our view apply with the Covid-19 crisis. So borrowers need to either look for a loop hole in their documents or appeal to their lenders for leniency.

Lenders across the country are therefore in crisis mode and are being asked to reset or defer financial covenants and offer payment holidays to their borrowers. The messages we are getting from the lenders is that frankly they have no choice but to offer this in certain sectors. Hotels and other commercial property financings is one example where we are seeing this. However this is by no means guaranteed and some reactions are less than helpful.

The Government is also stepping in to help, announcing a couple of financing arrangements that businesses can take advantage of. One is aimed at businesses with a turnover of up to £45m. From 23rd March, the Government will guarantee 80% of loans to such businesses of up to £5m. They will not charge for this and borrower’s won’t pay any interest for a year.

The second scheme is aimed at larger businesses that are used to operating in the debt capital markets and will enable those company’s lenders to access the debt capital markets in order to borrow at pre-Covid-19 rates, thereby re-establishing liquidity for those businesses.

The message is we are all in this crisis together so we need to work together to find solutions and get through it and borrowers and lenders alike are no different. Please let us know if we can assist you.

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