While the COVID-19 pandemic continues to play out, so do various business transactions, including lending transactions.
In the days since the World Health Organization declared the novel coronavirus a pandemic, the world has seen a significant increase in the imposition of travel restrictions and the closing of international borders. Markets have suffered significant losses as businesses in virtually all industries grapple with supply chain issues, mandatory and/or recommended quarantines and the practice of self-isolation (in some cases leading to business closures, work from home arrangements and/or layoffs), and general economic instability.
Prior to the pandemic, many businesses were in the process of borrowing money – whether to fund capital projects, to refinance existing debt, to increase working capital, or otherwise – and many of those businesses are relying on those funds to continue operating and growing their businesses through these uncertain times. Additional borrowing may also become essential or attractive as businesses look to navigate through this global crisis. This article provides some high level information for lenders and borrowers who are faced with the task of funding loans during this unsettled period.
Changing Financial Conditions and Impact on Covenants
The financial condition of many businesses have likely changed, potentially significantly, in the past number of weeks. These changes may result in borrowers being in breach of certain financial or other covenants which are often set forth in a credit agreement. Compliance with these financial and other covenants is typically a condition precedent to the funding of a loan, and may therefore create delays or issues as you look to close.
Lenders who are concerned about lending into a business that may be impacted by COVID-19 should be increasing the level of their financial and other due diligence. This may include, but should not be limited to:
- careful review of up-to-date internal financial reporting from the borrower group to provide a line of sight as to how, and to what extent, the borrower's business is being impacted by COVID-19 and related matters;
- requirements for current pro forma financial covenant compliance reporting so as to assess the impact of COVID-19 on a borrower's business;
- the requirement for bring-forward officer certificates from borrowers confirming the compliance by the borrower, as of the funding date, with all representations, warranties and covenants as set out in the credit agreement; and
- increased legal due diligence to identify (to the extent possible) other issues which may arise in this current economic climate including litigation and insolvency proceedings.
From a borrower's perspective, it is critical to be proactive and to ensure that all material issues including layoffs, cash flow issues and supply chain delays are promptly disclosed to your lender. This proactive approach will allow lenders and borrowers to potentially work through these unexpected issues and will avoid delays as the parties work to funding. It is often required that a borrower deliver an officer's certificate at funding, confirming that as of the date of funding all representations, warranties and covenants as set out in the credit agreement are true and correct and/or have been complied with, as applicable. If your business has been materially impacted by COVID-19 in the period between signing the credit agreement and funding, such an officer's bring forward certificate may be impossible to deliver. These issues should be addressed as far in advance of funding as is practicable.
Physical Closings and Signings
Lenders often require that original documents be delivered in the context of lending transactions. In the current COVID-19 climate, the ability to obtain original signed documents may be delayed or impossible where signatories are quarantined and/or self-isolating. Lenders should discuss this matter with their advisers and prepare for the possibility of closing on the basis of scanned documents and/or documents which are "docusigned" or otherwise electronically executed.
In the case of personal guarantees, there are additional concerns to be considered. In Alberta, for example, the Guarantees Acknowledgment Act states that "No guarantee has any effect unless the person entering into the obligation: (a) appears before a lawyer, (b) acknowledges to the lawyer that the person executed the guarantee, and (c) in the presence of the lawyer signs the certificate referred to in section 4". To the extent that the Guarantees Acknowledgment Act applies to your lending transaction, measures should be taken to ensure that the requirements of such Act are complied with as soon as possible before any guarantor becomes subject to a mandatory quarantine, as appearing before a lawyer is a requirement to the efficacy of each such guarantee.
This issue will also be live for client identification procedures which typically require signatories to meet with a lawyer in person to verify their identity.
Note in this regard that certain title insurance policies will offer coverage in the event of an allegation of fraud where client identification and verification, execution of documents, or commissioning of oaths have been conducted using virtual means.
Potential Delays with Registries, Courts and Other Public Offices
COVID-19 has resulted in governments recommending that most non-essential businesses be closed or restricted to limit the spread of the virus. This has already resulted in restrictions on access to courts, and it is possible that it may result in delays and/or closures of various land titles and personal property registries throughout Canada. Lenders, borrowers and their advisers should be paying careful attention to these matters and try to ensure that all court proceedings and registration matters are completed as soon as practicable.
Note that title insurance providers may offer extended gap coverage in the event of COVID-19 related registration delays and these policies should be discussed with your advisers as they may help avoid funding delays.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.