The economic damage caused by the COVID-19 crisis is proving to be more severe, and promising to linger a lot longer, than initially expected. As a consequence, over the coming months, more borrowers are likely to seek accommodations under their existing credit agreements, particularly in relation to financial maintenance covenants and liquidity enhancements.
In this briefing my colleague Alex Mocanu and I outline this trend. In particular, we discuss financial covenant relief, modifications to EBITDA calculations and reporting requirements, liquidity enhancement strategies, and other amendments and considerations.
It is likely that the trends identified in the loan market will continue and evolve based on the length and severity of the COVID-19 crisis, availability of government-backed financing and recovery in the syndicated term loan markets.
For borrowers, seeking relief from financial covenant compliance is an important logical step because calculation of the financial covenant is directly affected by COVID-19-related losses, and because doing so avoids an event of default under the credit agreement. The most common approach in the amendments we have seen so far has been to waive financial covenant compliance from, and including, the first quarter of 2020 up to, and including, the fourth quarter of 2020. The exact period for the financial covenant waiver will vary depending on the circumstances of the borrower. . .