The purpose of this note is to focus on issues that could particularly affect portfolio companies of private equity and other financial investors. We have a depth of experience in advising portfolio companies and PE houses at unpredictable times, including throughout the global financial crisis and the uncertainty arising from Brexit. Our team is working as usual during the current uncertainty and so please do feel free to pick up with your usual Travers Smith contacts or any of our team to discuss any issues.
Use your resources
The government announced a package of measures on 17 March 2020 which aims to ease the economic consequences of the current situation on businesses. While further details are awaited, these measures and any future measures that are put in place may mitigate some of the biggest financial risks facing businesses at this stage. Further details will follow on our COVID-19 resources page.
Investor Directors, Chairs and other Non-Executive Directors may have experience of shepherding businesses through similar crises and will also be able to leverage relationships across a portfolio to share best practice and latest advice on dealing with common issues across different businesses in the same or similar sectors.
Insolvency considerations
Whilst we hope that the current situation improves quickly, and businesses are not threatened with insolvency, it is prudent to take advice early if this is a real risk.
It is important for Directors to be mindful of the duties they owe to the Company, and Investor Directors may need to step down from Boards, or leave others within the Sponsor to make decisions relating to further funding decisions in order to avoid and mitigate conflicts. Taking advice early, and clear and well-documented decision making are some of the best ways to reduce the risk of personal liability for Directors.
Debt financing
Liquidity
In uncertain times, it is worth considering whether cash can be preserved - for example by extending interest payment periods or drawing on revolving credit lines. Alternatively, companies may consider negotiating extended payment terms with landlords and other suppliers to help with short to medium term cash flow issues. We understand that HMRC have been receptive to requests to delay payment.
MAC provisions
Loan documentation will not typically contain a "force majeure" clause. Instead a "material adverse change" clause (MAC) entitles lenders to react to an unforeseen change in the business or performance of a borrower, by calling an event of default and potentially accelerating a loan. These clauses are hotly negotiated, with multiple limbs, making it difficult for lenders ever to be sure that the circumstances entitle them to rely on this (frequently bespoke) provision. Even in the financial crisis in 2007–2008, only a handful of finance document MACs were called.
We expect that, given the general applicability of the current crisis to all businesses and the reputational risks for banks of enforcing MAC provisions (plus the legal obstacles to do so), lenders will be more likely to seek to restructure loans or otherwise reduce their exposure. It may however be worth reviewing these clauses to ensure you are aware of the rights that your lenders may have.
Payment and Settlement Mechanics
Business disruption resulting from COVID-19 could result in problems with payment mechanics. As has already been seen in the context of extended public holidays in Asia, the unexpected addition of public holidays can have unintended effects on settlement dates for
derivatives and interest payments and the timing of announcements.
Employment issues
Many employers are thinking about their contingency planning for large-scale sickness absence and widespread remote working, and whether the business has the capabilities for this. Many staff are now working remotely but this is not possible in many industries. Other measures to minimise the risk of infection spreading in the workplace include extra cleaning of communal surfaces (e.g. door handles, hand rails and lift buttons) and reminding staff to maintain good basic hygiene (e.g. by washing or sanitising hands frequently, especially after using public transport). Employers should monitor and follow the advice and guidance from government and relevant authorities, such as Public Health England, in order to discharge their general duty to protect the health and safety of staff and any visitors to their premises.
Given the wider economic impact, we are also working with many of our clients on possible business restructures and a variety of cost saving measures as alternatives to redundancies.
Please see our COVID-19 resources for further employee-related considerations.
Supply chain issues
Force majeure
Force majeure clauses may:
- relieve you of an obligation owed to a customer or third party; or
- relieve a supplier or a third party from an obligation owed to you.
The first step in either case is to check the scope of the relevant clause to determine whether the current circumstances constitute a force majeure event and to understand what this means for your ability to fulfil your contractual obligations, or recover damages from an affected supplier. The circumstances are in constant flux so it may be that practical remedies and mutually beneficial logistical changes are more effective than contractual remedies. Always remember your obligation to mitigate any losses.
Non-waiver
As supply chains suffer disruption, there will inevitably be discussions with suppliers and other counterparties in relation to updated timings of and other terms affecting deliveries. Even where contracts contain typical non-waiver language it is very easy to inadvertently waive legal rights when agreeing amendments to terms. We recommend that you mitigate this risk by ensuring that any relaxation of terms which may be agreed is documented in writing and clearly stated to be without prejudice to your legal rights under the contract, and not intended to affect future rights and obligations under the contract. When discussing potential amendments to contractual documentation, be sure to make it clear when and how you consider any commitments or arrangements to be legally binding.
