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By Beatrice Nyabira, Judy Muigai and Christine Murangi

Published May 4, 2020

 

The outbreak of Covid-19 has undeniably affected both borrowers and lenders negatively, with the exception of a few players such as those in medical supplies, basic food stuffs and certain technology, e-commerce and entertainment providers.

Businesses have been forced to confront the hard questions about how to continue running their operations seamlessly and keep afloat in the current global crisis. As the impact of the pandemic continues to unfold, almost all businesses have been forced to review their cash flow and liquidity positions to address a sudden and significant reduction in revenues.

The unforeseen and dramatic fall in revenues and available cashflows will inevitably put borrowers under significant stress, particularly where substantial repayments are due in the next couple of months. 

To compound the situation, continued access to funds under revolving working capital facilities or other sources is also likely to be challenging if there is potential for or actual default under the facilities. Ironically therefore, some businesses may be unable to access new funding or further drawdowns of their loans just when they need them most.

Borrowers should take proactive steps at this time including reviewing the terms of their existing facilities and where possible, engage with lenders at the earliest opportunity, to discuss the potential implications of the pandemic on their loans, particularly because it is difficult to predict with any precision how long the effects of the pandemic are likely to last.

As the situation evolves, one of the questions that corporate borrowers and their boards of directors continue to grapple with is whether a borrower’s obligation to comply with payment terms under its loan agreements can automatically fall away or be excused in view of the pandemic. The answer to this question is examined below.

FORCE MAJEURE

In the absence of any specific contractual provision allowing a borrower to defer repayment, a borrower’s obligation to make scheduled loan repayments as they fall due is not exonerated by events outside its reasonable control, which cause it cash flow difficulties.

Many loan agreements will not have any provisions excusing a borrower from its obligations if an event beyond its control were to occur (i.e. force majeure) and borrowers will therefore need to seek alternative forms of relief.

On the contrary, Covid-19 may instead lead to what is in effect a ‘material adverse change’ to the borrower’s financial position and ability to perform its obligations, which may qualify as an event of default under the loan agreement. 

This could in turn trigger a demand from the lender for accelerated repayment of the loan by the borrower. Acceleration when a borrower is struggling to pay even the ordinary scheduled amounts, could put the survival of many businesses at risk.

OTHER OPTIONS

All is not doom and gloom however, as each case will need to be considered on its own merits, including the wording of the loan agreement and the context in which the loan was made. Clauses that may be relevant include grace periods, disruption events, non-business days among others.

None of the above clauses would provide a defence for non-payment by the borrower for an irresolute or indefinite period, but a borrower faced with financial difficulties may seek some leniency from the lender under such provisions and in the current circumstances, most lenders may be willing to provide it.

This is especially so, taking into account the measures announced by the Central Bank of Kenya which are aimed at cushioning borrowers and the wider economy against the external shocks of Covid-19 and maintaining financial stability in the country.

Borrowers must, however, initiate this process by approaching their lenders, who will consider the respective circumstances of each arising from the pandemic. Parties should ensure to properly document any waivers or amendments to the terms of the existing loan agreements arising from their discussions, for future reference.

It is important to bear in mind that lenders also have their own financial obligations to meet and if their loan assets become non-performing on a large scale, then the very fabric of our financial markets is at risk.

It is with this risk in mind that policymakers and banking regulators in countries like Singapore are considering lightening the burden on banks by temporarily lowering the thresholds or measurements for capital adequacy and loss provisioning for non-performing loans. Continue Reading...

Source: The Business Daily