COVID-19: Issues to consider on loan financings in Asia Pacific

Lenders vs Borrowers considerations

Lenders vs Borrowers considerations

Lenders will be focused on:

• Drawstop events such as no EOD/Default and all repeating representations being true in all material respects.
• Reputation risk of calling defaults and accelerating in the current climate where borrowers are under financial stress from an external force.
• Any guidance or expectations communicated by their local regulator in relation to dealing with customers during this period and a need to demonstrate fairness in the approach taken for all of their borrowers.
• Any internal policies in place on managing expected increases in the bank’s non performing loans

Borrowers may be considering:

• Whether to request a waiver or an amendment to the terms of their loan – either as a result of an actual or anticipated breach of terms and/or
• Potentially an assertion of force majeure or frustration in relation to their obligations under the loan.

Lenders consideration – drawstop/acceleration: MAC

Drawstop events:

• no default
• repeating representations true and correct in all material respect

Will COVID-19 constitute a MAC EoD?

• Majority Lenders need to consider it is
• Factors to consider:
• what is “material adverse effect”?
• risk of Borrower counter-claiming for breach of funding obligations/wrongful acceleration?

Borrower considerations – avoid performance: Force Majeure

Force majeure clauses

• Force majeure clauses common in projects / service related contracts
• rarely in loan agreements
• excuses a party from performing a contract or an obligation under a contract

Can a Borrower assert that COVID-19 is a force majeure event?

• contracts with express force majeure provision – depends on the actual provision and interpretation
• contracts without a force majeure provision – would an English/Hong Kong court imply a force majeure clause into a loan agreement?

Relevance of “force majeure certificates” recently issued by the China Council for Promotion of International Trade in China?

Borrower considerations – avoid performance: Frustration

Arguments based on doctrine of frustration to avoid performance of the loan agreement due to COVID-19?

• Borrower might use the COVID-19 outbreak as a defence to a claim for breach of contract
• if argument successful, courts will hold contract to be discharged

Likelihood of COVID-19 being an event that would frustrate a loan agreement?

• low likelihood: bar is high to meet the legal test
• the supervening event (i.e. COVID-19) must have a frustrating effect on the contract. i.e.:
• performance impossible, illegal or radically different from what was contemplated; and
• the event was not foreseen (so, risk was not assumed/allocated under the contract)

Key principles: Force Majeure and Frustration

If there is a force majeure clause:

• specific wording in force majeure clause
• definition of specified events
• causation requirement
• notification requirements
• any exclusions?
• any requirement to mitigate?

If there is no force majeure clause:

• may consider frustration

• consider:

• is the event so fundamental
• not contemplated by the parties
• not self-induced; and
• rendered performance impossible, illegal or radically different
• argument unlikely successful in loan agreement context

Other requests by Borrower – waivers and amendments

• In the current climate, requests for waivers and amendment from borrowers are to be expected
• Borrowers may use this as an opportunity to reopen negotiations on existing or agreed form finance documents
• Where a borrower requests a waiver or an amendment to the terms of the loan agreement, lenders and facility agents will need to review the specific loan agreement to assess:

1. voting mechanics
2. thresholds for voting and majority lender/all lender requirements
3. any “snooze you lose” clause

• Important to record any waiver or amendment carefully and in writing
• And again, bear in mind government relief programmes and any local regulatory requirements

Signing and closing of deals

Physical signing and closing of loan transactions are rare these days – even so, practical issues arise as a result of the current environment, including:

• availability of board members to pass appropriate resolutions
• availability of signatories to sign execution documents
• availability of executed versions of documents
• given delays with postal service and couriers
• availability of original documents for filing purposes
• availability of condition precedent documents

Registration and filing deadlines

Conditions precedent or conditions subsequent in loan agreements will usually refer to a certain number of days or business days for the borrower or guarantor to complete the necessary government or regulatory registrations or filings. Some of the examples below are typical filings seen on a China related loan transaction.

Registration and filing deadlines often linked to the definition of “Business Day”:

• “within 15 Business Days after (a) signing the Guarantee and (b) any amendment to the facility which requires an amendment to the SAFE registration, evidence that the application for the registration/amendment registration of the Guarantee has been submitted to SAFE and accepted by SAFE”
• “complete the registration of the Guarantee with SAFE and provide the Agent with evidence of the completion of such registration within 90 days from the date of the Guarantee”
• “within 10 Business Days after each Utilisation Date, provide to the Agent evidence or confirmation that the Guarantor has reported the relevant information to NDRC”

Registration and filing deadlines – “Business Day” definition

• Standard definition of “Business Day” from an APLMA/LMA form of loan agreement:
• “means a day (other than a Saturday or Sunday) on which banks are open for general business in [location[s]” - N.B. the clause is jurisdiction specific (often dependent on the currency of the loan and location of borrower/agent) need to assess whether banks were open in that location/locations on the relevant day
• Due to lock-down, government office closures and extended public holidays, “Business Day” definitions should be carefully considered to confirm actual registration and filing deadlines
• As alternatives to “Business Days”, parties could consider using:
• “calendar days” - for general notices provisions; or
• “SAFE Business Days” for PRC related registration clauses (we have not seen “SAFE Business Days” used on loan transactions but it has been used on bond transactions)

Impact on notices provisions

• Notices provisions under loan agreements also often refer to “Business Days” – for example – the standard APLMA/LMA notices clause provides:
• “if by way of letter, when it has been left at the relevant address or [five] Business Days after being deposited in the post postage prepaid in an envelope addressed to it at that address”
• N.B. clause refers to the letter being “deposited in the post” – does not take into account delays in postal service once posted (e.g. where post offices have been closed for periods of time)

Registration and filing methods

• Registration and filing methods/company and insolvency searches:
• consider other affected jurisdictions and take local law advice
• in some jurisdictions, registration and filing can be submitted electronically (and company searches may be obtained online)
• The Hong Kong Companies Registry issued a number of press releases in February encouraging the use of electronic or postal filing given limited counter service available