-The COVID-19 pandemic has caused a lot of upheaval for businesses and individuals alike. Most borrowers have faced a decline in income, which has made it difficult for them to meet their financial obligations.
Borrowers should know that lenders have their concerns about meeting their needs bringing the importance of working together. Borrowers should also recognize that lenders have a right to ask them to pay their debts within the period known as the grace period. In most cases, the loans are only valid during this time and not after it has expired.
One issue during the pandemic is, whether or not to enter into a loan agreement. Here are the considerations that borrowers and lenders should factor in during the Covid-19 pandemic.
Covenant Compliance
During the pandemic, borrowers are experiencing low revenues; hence many are bound to breach their covenants according to EBITDA. Various provisions in EoDs are relevant inline with the Covid 19 implication to borrowers and lenders that they need to consider.
Undertakings for information- The level of reporting will vary depending on the loan agreement. Many borrowers will be required to:
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- Tell the lender if they are going to break the rules.
- Give lenders information to help them do their job.
- Provide confirmations as to no default.
Borrowers Should Request for Default Waivers
It’s vital to note that the default waiver provision works both ways, allowing the borrower to request a default waiver from the bank if they cannot complete their service obligations due to the pandemic. It’s permitted provided they have fulfilled their obligations under the loan agreement. It may, in turn, comprise a waiver resulting in default interest. Additionally, borrowers should see if other debts default due to other indebtedness.
Revenue Decrease
During the pandemic, the revenue decreases, and it is becoming more challenging for people to get access to money. In light of this, borrowers should secure payment relief appropriate to their financial condition, like a payment holiday or a capitalization.
Covid 19 has enabled borrowers to look at these representations and warranties. They help you decide what else to ask for. In particular, a borrower might want to ask for a change where COVID-19 does not count as a “material adverse effect.”
If you need money, you may need to sell some of your assets. It would be the best if you asked for an amendment to your loan agreement to do this. This way, if the sale of assets results in a reduction in future earnings, any financial covenant levels will change too.
Consideration of Lenders
Lenders should be aware of the following:
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- Consider if they need additional collateral.
- Lenders and lawyers should analyze the credit agreement’s assignment clauses and consider requesting revisions.
- They should ensure their interests are met.
- Lenders should probably limit the borrower’s ability to make junior payments, such as dividends and subordinated debt payments, while covenant relief is in effect.
Final Words
COVID-19 pandemic has caused many borrowers to be turned down for loans. As a result, lenders are more selective about the loan agreements they approve. This is a common practice during an economic downturn or crisis and should not come as a surprise. However, there are some steps you can take that may improve your chances of getting approved by a lender. You may get a free loan agreement from this website to avoid lawyer’s fee for a loan you are taking during this pandemic in California, Florida or in any other US state.