Occasions for COVID-19 to adjust existing credit contract commitments may include the following:

• Avoidance of (impending) maturity of existing loans as a result of:
  • Non-compliance with key financial figures / selected assurances as a result of (imminent) decline in business activity and thus EBITDA / cash flow; in the context of real estate financing, in particular through the absence of rental payments;
  • Non-servicing of debt service due to liquidity and / or impending insolvency; or
• General wish for an additional liquidity buffer as a precautionary measure (“Cash is King”).

Challenges

In the case of planned use of COVID-19-related state liquidity support (e.g. KfW special program 2020) and / or the implementation of COVID-19-related flexibilization of existing credit contract commitments, some aspects have to be considered in advance.

• Preliminary considerations
  • Restrictions: Usually, the existing loan agreements contain a tightly knit corset of assurances, conditions, key financial figures and accompanying reasons for termination, which limit, among other things, the absorption of new funds; and
  • Reservation of approval: Deviations and / or adjustments to existing credit agreements require the participation of the lender (depending on the agreed approval quorum).
• Relevant deviations and / or adjustments to existing credit contract commitments to cushion the COVID-19 effects are in particular:
  • Raising funds / liquidity aids to stabilize liquidity; and
  • Compliance / adjustment of the financial indicators.
• Keyword new liquidity
  • Every new borrowing always needs. the approval of existing lenders (excluding baskets); In addition, the following subject areas arise:
    • Compliance with the level of debt as a result of the additional debt; and
    • Granting of collateral (negative pledge): (keywords: free assets; secondary collateral; avoidance periods; ranking).
  • The following alternatives to the "classic" borrowing of new funds are based on the latest state aid programs (protective shield for employees and companies) and the amendments to the law to mitigate the consequences of the COVID-19 pandemic in the Civil, Bankruptcy and Criminal Procedure Law ( GAFCoV) and the Economic Stabilization Fund Act (WStFG) possible:
    • Use of temporary (ie until September 30, 2023) privilege for shareholder loans;
    • (Temporary) equity participation of existing financiers while avoiding the otherwise applicable restrictions (re-qualification of the loan); and or
    • Stabilisierungsmaßnahmen (einschließlich Rekapitalisierung) durch den neuen Wirtschaftsstabilisierungsfonds (WSF).
• Stichwort Finanzkennzahlen
  • Vor Mitteilung der Nichteinhaltung der Finanzkennzahlen besteht die Möglichkeit, durch Zuführung von (ggf. nachrangigen) (Gesellschafter-)Darlehen die Einhaltung ausgewählter Finanzkennzahlen ohne Mitwirkung der Kreditgeber zu „heilen“.
  • Nach Mitteilung der Nichteinhaltung der Finanzkennzahlen bedarf die Heilung/Verzicht der Rechtsfolgen (soweit keine Equity Cure Möglichkeiten eingeräumt sind) der Mitwirkung der Kreditgeber mit dem Ziel:
    • des temporären Verzichts (Waivers); oder
    • the permanent change in the key financial indicators (including the addition of COVID-19 special EBITDA add-backs in order to normalize the extraordinary effects; eg in real estate financing by adapting the relevant definitions of the "net rental income).

Conclusion

• The inclusion of COVID-19 liquidity assistance will mostly require the approval of existing lenders and will require a change / reconciliation process for existing loan agreements.
• Fundamental willingness of banks as well as private debt funds to participate is to be expected.
• It can be assumed that the implementation of COVID-19 liquidity aids can lead to a reassessment of the overall risk of the financing and thus to a (direct or indirect) increase in the cost of financing.