Impact Of Covid-19 In Financing Contracts And Corporate Restructurings

The health crisis caused by COVID-19 and the alarm period declared by Royal Decree-Law 463/2020 affect several spheres of companies, provoking many unknowns in all areas of their activity. The implication that this situation may have in relation to financing contracts and corporate restructurings is analysed below.

1.- Involvement of COVID-19 in financing contracts. Compliance with covenants; application for waivers and debt refinancing.

Most financing contracts include obligations to do, to not to do and obligations and financial ratios (covenants) in order to ensure that debtors fulfil or will be able to fulfil their obligations, and failure to do so could result in early termination of financing.

It is therefore necessary to assess the extent to which the current situation caused by COVID-19 may affect the regular procedure of financing contracts and the fulfilment of the obligations assumed in such contracts: the conditions for performing provisions; the scope of the information obligations assumed towards financial institutions; provisions included in the contract; financial covenants; mechanisms for cure of non-compliance, etc. It should also be assessed the extent to which a possible breach of covenants could constitute a case of force majeure.

In any case, it is usual for financing contracts to provide for the possibility for companies to request a temporary waiver of certain commitments or obligations from creditor institutions. When such waiver is requested in a justified and reasonable manner, creditors do not usually refuse it.

In the current situation created by COVID-19, it is sensible to appeal to the responsibility and reasonableness of companies and financial institutions to channel the situations that arise, and particularly, for banks to be flexible and responsive in granting waivers so that companies that request them can obtain a moratorium on the timely fulfilment of certain ratios or commitments or obligations, or even the non-applicability of some events that allow the early termination of these financial contracts.

However, there will be situations where the company faces more structural problems, rather than temporary, where the waiver request is not enough to deal with the difficulties, therefore it will be necessary to refinance the debt. Refinancing, which are usually formalized before notary, would be implicitly authorised by the rules set for this period of alarm.

2.- Involvement of COVID-19 in corporate restructuring

Some companies, in order to mitigate situations caused by the present situation, may need to carry out corporate restructuring operations (mergers, spin-offs, transfers of branches of activity). It may therefore be necessary to complete a corporate restructuring operation that was started before the period of alarm, or even to start a new one. All these corporate restructuring operations can be considered permitted operations, as they are subject to peremptory deadlines, and these are permitted by RDL 463/2020 which declared the state of alarm. In addition, it should not be difficult to justify the need to avoid irreparable damage to assets if they are not formalized.

Consequently, structural change operations (mergers, divisions, spin-offs or transfers of branches of activity) approved before the declaration of the state of alarm should be able to be completed and registered in order to have full effect before third parties, and in the same way, it should be possible to initiate and carry out corporate restructuring operations aimed at ensuring the viability of the company.

April 2020

The information contained in this note should not be considered in itself as specific advice on the subject under discussion, but only as a first approximation to the subject matter, and it is therefore advisable that the recipients of this note obtain professional advice on their particular case before adopting specific measures or actions.