The outbreak of COVID-19 is extremely challenging for many companies, the global economy and also the financial system. Some companies and production facilities have to shut down completely, international supply chains cannot be maintained and travel bans make it difficult for some industries to maintain their business.
Current and upcoming financings are affected by the Corona crisis, as well: Under certain circumstances, schedules for the construction of real estate can no longer be met or the planned acquisition of a company may no longer appear attractive. Finally, banks are affected by liquidity bottlenecks of their customers and are under refinancing pressure. In the following, we provide you with an overview of current developments on the credit financing market:
Current situation on the financing markets
At present, the credit financing market does not present a uniform picture:
- While in the areas of real estate finance and acquisition finance many ongoing contract negotiations are frozen or slowed down, lenders are generally open to new financing business despite the current situation. However, the refinancing markets and regulatory requirements are causing difficulties for some banks. Although there is no credit crunch yet, financing options are limited despite the fact that the number of potential financing partners remains large.
- In addition to the current business situation and the cash flow forecast, the most important components in the analysis of a new financing opportunity are the customer's business model and the underlying market sector. Short- and medium-term effects of the Covid-19 pandemic play a significant role for lenders.
- In view of increased credit default risk due to Corona, it currently seems likely that lenders will demand a slightly higher margin in comparison to recent months. In addition, the amount of interest might be dependent on the development of the project or company to be financed (margin ratchet).
- In our view, borrowers make use of existing free facilities and, in particular, draw revolving credit facilities up to the full amount. Any increase and/or extension options are also exercised in order to substantially increase the liquidity buffer.
- Companies are currently intensively examining the use of the KfW special programmes and are in close dialogue with their house banks so that the banks cover liquidity gaps and participate in KfW-supported financing. In detail, however, many individual issues need to be clarified beforehand, such as
- Amount of indemnification of the KfW (i.e. SME or large enterprise)?
- Requirements of a firm in difficulty?
- Granting of security and if yes, kind of security?
- Possibility to integrate the Kfw-financing into existing financings?
Financial covenants
As a consequence of the Corona crisis, there is the risk of breaches of financial covenants.
- In the case of real estate financing, the debt service cover ratio and the interest service cover ratio may be adversely affected by, for example, the late completion of a property or loss of rental income.
- In the case of corporate and acquisition financing, the financial ratios must be thoroughly examined for corona effects depending on the order situation and the operability of the company.
Given the rapid progression of the Corona crisis, there are no standard developments in connection with the negotiation of financial covenants. Corona-related adjustments to headrooms (buffer amounts) and the agreement of time periods during which financial covenants are either extended or suspended may be considered. Whether existing adjustments can also be used for corona-related effects, must be assessed separately for each individual case, so that in some economic areas no adjustment of the financial covenants will be necessary.
Outlook
The unpredictability of the developments of the Corona crisis represents a major challenge for all parties involved in credit financing. It is therefore important that the parties involved maintain an open dialogue with each other, conduct transparent discussions and carefully evaluate the risks of all parties involved.
We have compiled on our website comprehensive information and recommendations for action in response to the legal implications arising from the coronavirus pandemic: Coronavirus - legal issues
