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Coronavirus – Debt Implications and Safeguards

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As the coronavirus continues to spread, national governments and individuals have begun to take precautions to try and contain the outbreak. Policy developments are fast paced and evolving hourly.

The strength of the UK economy will be tested as the number of confirmed cases continues to rise. This will have clear implications for the business community as revenue streams begin to be strained and employees self-isolate. Additionally, supply chains could be affected by travel restrictions and increased custom checks from countries where the outbreak is more prevalent.

Macroeconomic factors have put pressure on international equity markets, which have been experiencing extreme volatility, sustaining their worst weeks since the 2008 financial crash. The market sell-off is a symptom of a combination of factors, including coronavirus fears, Russian-Saudi oil price war and US travel restrictions.

There will be short-term impacts on the corporate debt markets as funders re-evaluate their risk appetite. Nevertheless, businesses with strong fundamentals that are experiencing the short-term impacts of the virus will naturally continue to be supported by lenders. However, lenders will be more cautious in providing facilities to highly leveraged firms that may struggle to service their debt obligations whilst banks reduce their exposure to fundamentally weaker businesses.

Borrowers should revisit facility documentation to check the wording of any Material Adverse Change (MAC) clauses. These can be used as triggers by funders; however, most UK-style MAC clauses are not as onerous as some international equivalents and ultimately, UK financial institutions are looking to be as supportive as possible during this difficult period.

Central banks and governments have taken unprecedented action to ease market anxiety.

Both the Bank of England and the Federal Reserve have lowered interest rates by 0.5%, which has signalled to the financial markets that the central banks will support further. Additionally, the Bank of England has relaxed capital requirements for banks that are willing to support SMEs by adding £190bn of additional liquidity to the market.

Chancellor Rishi Sunak unveiled a £30bn package to boost the UK economy to get the country through the coronavirus outbreak, of which £12bn will be specifically targeted at coronavirus measures. A package of tax and spending measures has been unveiled to reduce the economic and social consequences of the virus. SMEs have been given significant support, associated with statutory sick pay and relaxing tax payment obligations for firms experiencing cash-flow issues.

A number of high-street banks have offered support schemes for both individuals and SMEs that are the most exposed to the coronavirus. For individuals, lenders have offered mortgage and loan repayment holidays, access to long-term savings accounts, free credit card and cash withdrawals and extended overdraft facilities. SMEs have been offered relief on fees and loan repayments to some businesses hit by the virus. By way of example, HSBC and Natwest have allocated £5bn of business support. We are in active dialogue with the banks to understand how the support will operate in practice in order to advise clients accordingly.

For businesses that are experiencing the negative effects of the coronavirus, it is best to check legal documentation around debt obligations. Forecasts should be revisited to account for the impact of the virus, applying ‘what if’ scenarios and stress testing exercises. Seeking professional advice is likely to help alleviate personal anxiety around the coronavirus; and engage in early dialogue explicitly with stakeholders, including funders, making them aware of the expected implications of the outbreak on the business.

The implications of the coronavirus are fast evolving, uncertainty is likely to continue; however, the UK Government, Bank of England and major banks have put measures in place and are fully committed to supporting businesses throughout this uncertain period.