Corona: Banking & finance
This article is part of our continually updated corona resource center.
The rapidly spreading corona pandemic and the increasing prevention of physical social contacts (lockdown) are now already showing in some cases massive negative effects on companies from particularly affected sectors (travel industry including airlines and bus lines, hotel, catering and event event management industry, exhibition stand builders, automotive suppliers, etc.). It is to be expected that as the pandemic progresses, similar effects will also be felt by companies from other industries.
Against this background, we recommend that lenders, financial service providers and borrowers examine the following questions:
A. Finance contracts
Financial key figures
Financial key figures (financial covenants) agreed in credit agreements serve as an "early warning system" for the financing parties. The fact that the breach of the financial covenants triggers events of default means that the financing parties secure a "place at the negotiating table" at an early stage if the borrower encounters financial difficulties. In some cases, the breach of financial covenants also leads to automatic interest rate increases (margin ratchet) or other restrictions such as distribution blocks or the obligation to fill reserve accounts. In view of current developments, borrowers should keep a constant eye on their financial ratios and seek early consultation with the lender in the event of any breaches that become apparent. Lenders (or facility agents), in turn, should informally initiate an exchange with the borrower side regarding the development of the financial covenants beyond the "hard" information rights or obligations. It should be examined whether certain buffers (headrooms) are sufficient to absorb the current negative developments. In the case of corporate or acquisition financing, key financial figures are regularly based on EBITDA or EBIT. The financial parameters regularly allow for adjustments due to exceptional circumstances (Exceptional Items). It must be examined whether the EBITDA or EBIT financial ratios can be adjusted in this way or whether further adjustments are required. If a breach of the financial ratios is foreseeable despite the use of headrooms and adjustment mechanisms, the borrower should propose a strategy for adjusting (waiver) or suspending (covenant holiday) the financial ratios at an early stage.
It must also be examined whether termination rights due to the breach of financial covenants are affected by the suspension by the CorInsAG (in case of an extension of the scope by the Federal Government) (see above).
In some cases, the borrower is obliged under the credit documentation to explicitly repeat certain assurances, or certain assurances may be considered repeated under the credit documentation (repeated representations). For example, the Borrower may warrant that no termination events have occurred under its project contracts or other contracts with third parties (which may be the case due to the development of the Corona Pandemic), that information submitted so far is correct (but may be outdated by the Corona Developments), or certain assurances may be given with regard to the financial situation or the last submitted financial statements (which may no longer be correct due to the Corona Developments).Borrowers and lenders are advised to check the repeated assurances.
Credit agreements regularly provide for information obligations on the part of the borrower with regard to extraordinary business transactions (insurance claims above a certain amount, lawsuits for amounts above a certain amount, special business failures, etc.) as well as with regard to edn occurrence of reasons for termination. Borrowers should review their loan agreements with regard to the question whether, in view of current economic developments, special information obligations exist in order to avoid the occurrence of (possibly further) grounds for termination.
Loan agreements (e.g. No. 22 of the Savings Bank General Terms and Conditions) provide that the Bank may require the customer to provide or increase security for his liabilities if a change in the risk situation arises as a result of circumstances that have subsequently occurred or become known, e.g. due to a deterioration or imminent deterioration in the financial circumstances of the customer, a jointly liable party or guarantor or the value of existing security. If the Borrower fails to comply with the obligation to provide additional collateral, this usually constitutes grounds for termination. Banks should check whether there is a right of subsequent collateralization under the credit documentation and whether this right should be exercised if necessary. In this respect, it should be examined whether credit risks should be assessed differently if the borrowers are particularly affected by the corona virus.
Against the background of the CorInsAG, it must also be examined whether termination rights are suspended by the CorInsAG in case a request for additional collateral is not complied with (see above).
Credit agreements regularly provide for certain operating obligations (covenants) of the borrower. This applies in particular to construction schedules or completion dates. Borrowers should review their credit documentation to determine whether the corona developments jeopardize compliance with the operating obligations. If this is the case, borrowers should seek discussions with the lender at an early stage in order to agree on an adjustment of the covenants. Financing parties, in turn, are also recommended to seek informal discussions with the borrower side with regard to endangered operating covenants, if the borrower side remains inactive in this regard.
Many loan agreements provide for termination rights of the financing parties in the event of a material adverse change in the economic or financial situation of the borrower (Material Adverse Change Clause / MAC Clause). The MAC Clause is not standardized, but is individually tailored to the borrower's business model. Borrowers should check whether the MAC Clause could be applicable under their credit documentation and, if so, seek early discussions with the financing parties. The financing parties themselves should also check this and assess whether measures can and should be requested from the borrower on the basis of the MAC Clause. Against the background of the CorInsAG it should also be examined whether the MAC Clause is affected by the suspension of the right of termination by the CorInsAG (in case of an extension of the scope of application by the Federal Government) (see above).
The granting or extension of loans to companies in situations close to insolvency is in principle associated with increased risks for lenders. In the extreme case, liability for aiding and abetting the protraction of insolvency and liability for immoral deliberate damage (§ 826 BGB) may be imminent due to the granting or extension of a loan (so-called lender liability). The new granting or extension of loans to companies in sectors particularly affected by the Corona crisis is still possible in principle and also economically necessary. In such cases, however, the banks should be prepared to incur increased auditing and documentation costs. Please feel free to contact us at any time.
Upstream Security und Cross-Stream Security
In the case of larger financing transactions, companies regularly provide guarantees or assurances for their parent companies (upstream security) or for their sister companies (cross-stream security). Such a provision of security can potentially trigger a violation of capital maintenance regulations. While it was common practice until the BGH decision of March 21, 2017 - II ZR 93/16 to restrict the possibilities of realization accordingly (so-called Limitation Language) in order to avoid such a violation, this has not always been necessary since the aforementioned decision. A violation of the capital maintenance regulations is excluded if - from an ex ante point of view - the counter-performance or restitution claim against the shareholder is expected to be fully valid due to the provision of security. Accordingly, a Limitation Language has in some cases been waived for Upstream Security or Cross-Stream Security. In cases in which a Limitation Language has been waived, the managers of the collateral provider are, however, obliged to observe the financial circumstances of the shareholder and to react to an impending deterioration in creditworthiness by requesting collateral or enforcing the claim for consideration or return. This constellation can currently occur if the parent or sister company of the collateral provider experiences a deterioration of assets due to the corona pandemic. Companies that have provided guarantees or collateral for their parent or sister company should therefore consider whether collateral should be required from the parent company for the counter-performance or restitution claim.
In the case of takeover bids for listed companies, the bidder must provide evidence of the funds required to fulfil the bid ("confirmation of financing" by an independent securities services company, section 13 para. 1 sentence 2 WpÜG). Under loan agreements for acquisition financing, termination rights are therefore limited for a certain period of time to serious threatened reasons for termination (major defaults) and assurances (major representations), e.g. insolvency, breach of material conditions, loss of material contracts, etc. In the case of private acquisitions, a certain funds period is not prescribed by the supervisory authorities, but both seller and buyer regularly want to minimize the risk that a disbursement condition is not met on the closing date and the loan is therefore not disbursed. Consequently, certain funds rules are also regularly agreed upon for private acquisitions. Whether a major default has occurred or a major representation has occurred or may occur as a result of the Corona development must be analyzed on a case-by-case basis. Please feel free to contact us at any time.
Financing commitment (commitment letter)
Once the borrower and lender/arranger have negotiated a term sheet, the lender/arranger regularly issues a commitment letter (commitment and mandate letter). The commitment is often subject to the condition that no material adverse change (Material Adverse Change / MAC) has occurred in the meantime in the syndication, financial or capital markets, in the business of the borrower or (in the case of acquisition financing) in the business of the target company (Target). With regard to existing financing commitments, it should be examined whether the current corona development represents a material adverse change. For new Commitment Letters, the parties should consider the issue of corona development when drafting the MAC Clause and either clarify that corona-related changes may or may not constitute a MAC.
In the case of a primary syndication of a loan, the Arranger regularly reserves the right to adjust the pricing and/or the terms and conditions of the loan by means of corresponding clauses in the Syndication Letter or the Commitment Letter if it considers this necessary for a successful syndication. In view of current developments in the corona crisis, market flex clauses must be carefully examined both in existing contracts and in future syndications.
In the case of contracts with several parties, banks and borrowers often prefer to sign the contracts at a meeting (e.g. at the bank's offices) for smaller financing transactions. It is recommended that this physical signing be replaced by the exchange of PDF pages based on the LMA contract conclusion clause (PDF Signing).
A cross default clause is a clause in a loan agreement according to which a reason for termination occurs as soon as another loan agreement of the borrower (i) can be terminated (cross default clause in the broad sense) or (ii) is terminated (cross acceleration clause). In the broadest sense, the cross default clause refers not only to third-party claims against the borrower itself, but also to claims against companies affiliated with the borrower (possibly also with their registered office abroad). The current economic development leads to an increased risk of cross defaults, especially in the case of broadly formulated third-party default clauses. Borrowers should review their credit documentation with regard to cross defaults and, if necessary, seek early discussions with the financing parties. Financing parties should also review the third party default clauses of their credit agreements, not least to prevent rights from being forfeited due to prolonged inactivity.
Reasons for termination due to interruption or discontinuation of operations
Credit agreements often provide for material interruptions of business or cessation of business (cessation of business) as grounds for termination. Borrowers and lenders should examine whether such reasons for termination may have been caused by the corona development. Against the background of the CorInsAG it should also be examined whether the MAC Clause is affected by the suspension of the right of termination by the CorInsAG (in case of an extension of the scope of application by the Federal Government) (see above).
B. State financial support
Make sure you check whether government financial support to prevent liquidity bottlenecks for companies is eligible. We would be pleased to support you in this. In detail:
KfW aid programme
On 23 March 2020, the government programme for financial support by the KfW begins. KfW's corona aid is not a grant (one-off financial contribution which does not have to be repaid), but a low-interest loan.
As a matter of principle KfW has to examine each application individually - even in the Corona crisis. So it may take a few days before the money flows. In order to obtain a bridging loan from KfW, companies would have to turn to their respective house bank or to a development bank in the federal states. There are various aid programmes under which KfW assumes up to 90 % of the risk if the conditions are met:
KfW entrepreneur loan (037/047)
The most important facts in brief
- KfW Corona aid for investments and operating funds
- Up to EUR 1 billion loan amount
- For companies that have been on the market for at least 5 years
- Up to 90 % risk assumption
ERP start-up loan - universal (073/074/075/076)
The most important facts in brief
- KfW Corona aid for enterprises
- For investments and working capital
- Up to EUR 1 billion loan amount
- Up to 90 % risk assumption
Direct participation for syndicated financing (855)
The most important facts in brief
- For financing from EUR 25 million
- Up to 80 % risk assumption by KfW
- For investments and working capital in Germany
- Flexible financing structures
You can find out more on the KfW website.
Financial Corona emergency aid from the Swiss Confederation
The federal government now wants to provide financial support for small and medium-sized enterprises. To this end, it has launched an additional aid package, which also includes direct subsidies for small businesses and the self-employed.
It is mainly concerned with those companies and entrepreneurs who usually do not receive loans and have no collateral or further income. Up to 50 billion euros will be made available for this purpose.
The programme aims to secure the economic existence of the applicants and help them to bridge acute liquidity bottlenecks.
Eligible for funding are micro-enterprises from all economic sectors, self-employed persons and members of the liberal professions.
These target groups can receive emergency aid according to the following scale:
- up to five employees: up to EUR 9,000 one-off payment for three months
- up to ten employees: up to 15,000 euros single payment for three months
The employment figures refer to full-time equivalents. Part-time employees can therefore be converted to full-time equivalents.
Economic Stabilisation Fund
The Federal Cabinet has also approved a draft law on the establishment of an economic stabilisation fund (WSF) in the amount of 600 billion euros, which is intended to cushion the economic damage threatened to companies by the corona crisis.
The stabilisation fund is to be used to strengthen large companies with capital, and the state is to be able to take a stake in the companies if necessary.
Up to 400 billion euros in loan guarantees for the companies are planned, 100 billion euros are available for possible company investments.
Financial Corona emergency aid by the federal states
The federal states are also helping the self-employed, freelancers, small businesses and, in some cases, small and medium-sized enterprises.
In order to ensure the economic survival of as many companies as possible, all federal states have set up numerous aid programmes (protective shield for the economy).
Some of these are taxable grants that do not have to be repaid.
C. Adapted prudential requirements
The supervisory authorities try to relieve banks to the extent that this is possible without (additional) losses to financial stability. Changes in financial supervision requirements are published on the websites of BaFin and the ECB on an ongoing basis. Essentially, the statements relate to the current restriction of personal contacts, explain the process and possibilities of lending in the crisis and specify capital and liquidity maintenance rules:
The following adjustments resulting from the restriction of personal contacts
Communication with BaFin: A large number of BaFin's administrative staff are currently (as of 26 March) working from home, but in our experience they can be reached without restriction by e-mail and, as a rule, also using the regular extension numbers.
Examinations: On-site inspections by banking regulators are temporarily suspended. On-site audits, e.g. as part of the audit of the annual financial statements pursuant to sections 28 et seq. KWG or § 89 WpHG may also be waived.
Lending during the crisis
Credit assessment: The BaFin interprets § 18 KWG in such a way that the last available annual financial statements are sufficient, as a rule currently the annual financial statements from 2018. Particularly with regard to the granting of loans to companies which have only got into financial difficulties as a result of the Corona crisis and which are to be granted a KfW loan, the BaFin sets lower requirements for this credit assessment than in normal times.
Both interest rate cuts and deferrals of loans do not necessarily mean that such loans are to be classified as defaulted, following the EBA's call for flexibility and pragmatism, BaFin explains:
Interest rate reduction: BaFin points out that Art. 178 (3) (d) CRR only applies if an institution makes concessions to a debtor who gets into financial difficulties, but not if it passes on more favourable refinancing costs, for example after transactions with the central bank.
Deferment: Deferrals by government orders are in principle neither considered as deferment in the sense of Art. 47b CRR nor as deferment in the sense of § 178 CRR. If the original effective interest rate does not fall by more than 1%, deferred liabilities are not classified as a "material overdue liability" under Art. 178 (1) b) CRR. The debtor's financial obligation is not considered to be reduced, so that there is no "crisis-related restructuring" as defined in Art. 178 (3) d) CRR. In the event of such a singular crisis, different standards than in normal times must certainly be applied to the due diligence obligations customary in the industry within the meaning of MaRisk. This would also be taken into account in subsequent audits.
Problem loans: Even if lending terms and conditions are flexible and customary banking instruments are used flexibly, it must be determined whether an exposure can still remain in intensive support within the meaning of BTO 1.2.5 para. 2 of MaRisk despite significant defaults. According to BaFin, this is possible if the counterparty default risk of the loan can at least be limited and legal risks of the customary intensive support of the loan have been sufficiently examined without an expert restructuring opinion.
Use of capital and liquidity buffers
Undercompliance with the combined capital buffer requirement does not constitute a breach of minimum supervisory capital requirements. Institutions can easily use the capital tied up in the capital buffers for lending purposes.
Liquid assets held as part of the liquidity coverage requirement (LCR) may be used. According to Art. 414 CRR, no approval is required but notification is necessary (cf. also ECB and BIS).
Short-time work in regulated companies
In principle, there is no specific legal restriction with regard to the introduction of short-time work even in regulated companies. Regulated companies must, however, have adequate management, control and administrative procedures in place, especially in the event of a crisis, and they must fulfil risk management and due diligence obligations in proportion to the reduced business activity. According to AT 7.1 (Personnel) of the MaRisk, the quantitative and qualitative staffing of regulated companies must be based in particular on internal requirements, business activities and the risk situation. Short-time work absences of employees should therefore not lead to sustained disruption of risk management obligations.
Management of operational risks
Even in a crisis, institutions must record loss events appropriately. On the basis of risk reporting in accordance with MaRisk BT 3.2 point 6, a decision must be made as to whether and which measures are to be taken to eliminate the causes or which risk management measures are to be implemented.
D. Other virulent questions
You should also check the following questions:
- What effects do annuity suspensions of up to two months (60 days) due to the corona crisis have on the credit portfolio and solvency of banks? Do such annuity suspensions lead to an increase in capital requirements? BaFin has published a clarification in its FAQ which clarifies the regulatory consequences of a suspension of annuities of up to two months (60 days) for banks.
- Does your company fall under the announced unlimited credit program? Federal Finance Minister Olaf Scholz and Federal Economics Minister Peter Altmaier have presented a package of measures worth billions to combat theconsequences of the coronavirus. They announced an unlimited credit program for companies.
- Does your company benefit from the tax relief? In agreement with the supreme tax authorities of the federal states, the BMF has issued regulations that provide tax relief for taxpayers affected by the consequences of the Corona crisis. Of particular importance is the possibility of deferring tax claims without interest.