Service: Business strategyTransaction services

Breaches of banking covenants

By Richard Kleiner

25 Feb 2021

I recently read that the Prudential Regulation Authority is suggesting that lenders to take a more flexible approach towards covenant breaches as a result of COVID-19. 

It is hope that this will result in lenders and borrowers being able to review actual or anticipated covenant breaches through proactive dialogue. It needs to be accepted that any breaches for the period before the pandemic hit (March 2020) are unlikely to be materially affected by the impact of COVID-19. However, for breaches in covenants for the year to June 2020 and beyond will be relevant for such discussions between lenders and borrowers.

It is important that borrowers, in preparation for discussions with lenders, fully prepare for such discussions and, in particular, to understand the impact on the covenant metrics. Lenders will certainly want to get under the skin of the most recent results of the business with detailed explanations as to the impact of COVID-19. Lenders will also want to review the future projections which hopefully will show how the business will survive the impact of the pandemic. The explanations together with any evidence need to be fairly detailed as there is evidence that lenders are becoming wary of generic explanations.

Borrowers should also be familiar (perhaps with professional advice) to fully understand the definitions and wording in any debt facility agreement, especially those provisions that address the short and medium term impact of the pandemic. These will include definitions in terms of financial metrics including EBITDA and Exceptional Items. It is very important that borrowers, when engaging with their lenders, will need to make a clear distinction between the financial impact of COVID-19 as distinct from other trading conditions. 

We have extensive experience in dealing with such situations and preparing the data and reports that lenders will expect to review as part of discussions around covenant breaches, and indeed with regards to the ongoing relationship between lender and borrower. In the first instance please contact either myself or your usual contact.
 

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