Will banks use the fine print to restrict lending?

Banks and other lenders used esoteric jargon to break out of financing deals during the global financial crisis. Today, private equity firms, fearing that the banks will leave them behind again, are encouraging portfolio companies to draw down on their revolving lines of credit just in case 2008 repeats itself.

Loan agreements contain clauses describing material adverse changes, or MACs, under which they no longer have to commit to finance. These clauses require counterparties to ensure that there have been no events or developments – such as the global epidemic of the new coronavirus – that could materially affect the company.

In today’s markets, however, companies’ access to liquidity can be the difference between survival or failure.

“We’ve already noticed that some private equity clients are advising portfolio companies to dip into their guns,” said Andrew Glenn, partner at Kasowitz Benson Torres law firm. Institutional investor.

“This was done in anticipation of a credit crunch or an argument that a MAC would allow banks to stop funding revolvers,” he added. “It looked like it would happen exactly as we saw during the Great Recession: that the banks might act opportunistically.”

In 2008, these clauses deprived companies already in difficulty of liquidity.

Glenn explained that there is an increased risk that banks and other lenders are now using these clauses as a way out of deals they suddenly find unfavorable.

“In the last cycle we saw banks that didn’t like the terms of a loan and then used the Great Recession and MACs to get out of a deal or play with the borrower,” he said. -he declares.

[II Deep Dive: Private Markets ‘Not Immune’ to Downturn]

Glenn said most of the activity will likely hit struggling airlines, hotels, casinos and the hospitality industry. But he said he had also received calls from companies in other sectors, especially as the shutdowns of companies had spread to large swathes of the economy.

In a Covenant Review report released on Wednesday, the credit research firm argued that MAC clauses can be worded very differently and contracts need to be closely scrutinized. The Covenant Review Report examined whether lenders can refuse to finance loans under committed but unused credit facilities.

“In the United States, the main concern is whether revolving lenders should fund committed but unused facilities amid deteriorating market conditions,” according to the report. “The implications of the coronavirus (COVID-19) outbreak on potential, committed and existing leveraged finance remain a critical issue for global financial markets. “

Glenn said he and his partner Marissa Miller successfully battled what they saw as abuse in 2008 and 2009 and ultimately succeeded in getting lenders to honor their loan commitments.

“We’re at the start of this,” Glenn said. “We are all economic players and people will act in ways that protect their interests for better or for worse.”

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