The global capital markets are in a state of flux, with major sell offs in global stock markets due to fears about the impact of the COVID-19 coronavirus, as well as a result of the slump in oil prices. In these precarious and volatile times, Issuers should take time to consider the following:
Issuers with securities outstanding should continue to review the Terms and Conditions of their outstanding securities as the crisis develops to determine whether the circumstances trigger an event of default or a cross-default. In particular:
- Non-payment: Market conditions and potential short term cash flow issues could make it difficult for some Issuers to pay interest as it falls due or repay principal. Following the expiration of any applicable grace period, such non-payment would trigger an event of default. Issuers should start considering now how to raise any additional funds required to ensure compliance.
- Financial Covenants: Loss of income and deterioration in asset values are likely to negatively affect Issuers’ compliance with their financial covenants. Issuers should continue to monitor compliance with their financial covenant package and if a future breach looks likely, consideration should be given as to how to ensure such potential breach is avoided, or whether to seek either a waiver of a potential breach or the consent of the holders to amend the financial covenant package prior to any potential breach to avoid such a breach.
- Rating Agencies: The impact of COVID-19 may lead to the downgrade of an Issuer’s credit ratings. Issuers should consider if there is a requirement included in the Terms and Conditions that they retain a certain rating and the potential impact of a downgrade.
- Insolvency: Issuers should also carefully review the applicable provisions for an event of default triggered by insolvency, as there may be circumstances other than an actual insolvency proceeding that could cause there to be an event of default.
- Moratorium: In the event that the government in the country where an Issuer is located issues a moratorium on the payment of foreign currencies abroad (e.g., U.S. Dollar payments), such an Issuer may face an event of default if it cannot source foreign currency outside its home country. Issuers who do have accounts or subsidiaries abroad may be able to use these resources to avoid a non-payment event of default. Where this is or may become an issue, Issuers should speak with government authorities to seek appropriate exceptions.
- Cross-default: If the Terms and Conditions include a cross-default, Issuers should also consider whether any of their other financing arrangements include an event of default that would be triggered by the current circumstances, and if such financing arrangements meet the threshold included in the cross- default provision.
Once stability returns to the global capital markets, many Issuers will look to access capital quickly. Issuers considering a future issuance should note the following disclosure considerations:
- Diligence: Issuers should be prepared to discuss the actual or likely impact of COVID-19 with the banks advising on the issuance and should consider the type of information that may be required to be included in the prospectus. Relevant disclosures include significant supply disruptions, contract terminations, disruptions to travel, workplace restrictions, changes in liquidity or debt arrangements, illness of key executives, material changes in compensation arrangements, insurance coverage and litigation.
- Risk factors: Prospectuses should now include a risk factor outlining the potential threat posed by COVID-19, as well as any other communicable diseases. Such risk factor should include the specific threat to the Issuer’s industry, business and region, including disruptions to travel, workplace restrictions, the impact on the supply chain, employees, customer demand, liquidity and impairment issues. Those Issuers with MTN programmes should review their existing risk factors to assess whether they continue to adequately caution investors as to how results may differ from previous expectations as a result of the pandemic or if these should be updated prior to the next issuance.
- Management’s Discussion and Analysis: Any future issuance should include a recent development section setting out trends or uncertainties that have impacted the Issuer’s financial position. This should include detailed discussion of the expected impact of COVID-19.
- Rating Agencies: Issuers may need to discuss the actual or likely impact of COVID-19 with the rating agencies. Again consideration should be given as to the effect of a downgrade.
For further information, please contact your usual Dechert contact, or a member of the International Capital Markets team.