Few will now argue that the global recession has arrived. Forecasts for 2009 are generally far from optimistic and the effects are already being felt here in Australia. No more evidence is needed than the recent Rudd Government response to the concerns of commercial developers obtaining refinance for loans by foreign lenders. The so called, "Rudd Bank" highlights that for the next few years at least, existing borrowers will need to:
- consider carefully the ease with which they will be able to refinance existing loans and
- ensure that existing facilities are conducted in exemplary fashion.
In the current economic conditions where the credit market is tightening, refinancing is becoming increasingly difficult and lenders are becoming more risk averse, borrowers can anticipate volatile lending conditions. Issues include tougher terms of lending, much closer scrutiny of servicing patterns and compliance with terms and conditions of facilities. Borrowers should not be giving lenders a reason to request variation fees or the ability to renegotiate existing terms and conditions or worse, call for repayment of all or part of the debt. Failure to comply with existing facilities may also impact on borrowers' ability to refinance.
It is therefore a timely opportunity for all borrowers to audit their facilities and ensure that there have not been any breaches which may potentially prejudice their position moving forward. It is far better to review the position early and take steps to mitigate any damage rather than deal with the consequences of default which can be severe, particularly in current times.
This article sets out a checklist of major areas which a borrower should review to ensure that its facilities are in order and any refinance with the same or another lender is not impaired.
Review Terms Of Facilities
- If facilities are to mature within the next 1 to 2 years, consider refinancing options now. Do not underestimate the time it may take to refinance existing facilities. Many borrowers with 12 or 18 months to run on their facilities are refinancing now to ensure funding throughout these difficult times.
Monitor Financial Ratios
- Ensure that any decline in asset values (notably equities and real property) and decreased earnings will not breach any loan to value ratios and gearing covenants, the consequences of which may be a demand for additional equity or security by the lender to support existing debt (not to mention breach and variation fees and renegotiation of other terms and conditions).
Review Covenant Compliance
- Review all facilities to confirm maturity dates.
- Review terms and conditions of existing lending agreements to ensure that any ongoing conditions have been complied with. In particular, review key dates for compliance with financial and other covenants and assess the company's ability to meet upcoming covenants. Consider whether the most appropriate approach is to liaise with lenders early on potential future covenant breaches.
Market Disruption Provisions And Material Adverse Event Provisions
- The mismatch between the banks' funding costs and market based reference rates (such as BBSY or LIBOR) has led to banks revisiting their standard market disruption clause (which allows lenders to adjust the relevant interest rate under a facility agreement to take account of adverse changes to the lender's cost of funds as a result of a market disruption event). Various banks have sought to rely on market disruption clauses in recent times to increase interest rates under facilities.
- In current market conditions, lenders might seek to rely on material adverse effect (MAE) provisions typically incorporated in facility agreements. MAE provisions typically limit the lenders' commitment to provide finance and often allow them greater rights where there has been a material adverse effect on the business or financial or other condition or prospects of a borrower or security provider under a facility or their ability to perform their obligations under the finance documents. An MAE is also often a default under finance documents, with the usual consequences.
- Most facility agreements will have market disruption and MAE provisions and, if they don't, banks will be seeking to ensure they are included in existing and future facility agreements.
Review Security Documents And Events Of Default
- The security documents (such as fixed and floating charges, mortgages, guarantees and tripartite deeds) will list in detail all acts which will be held to be events of default (those events the lender can rely upon to call in the facilities and seek recovery under the securities, among other rights).
- Ensure you have not potentially committed an event of default by reviewing closely the security documents.
Review Fees And Default Charges
Note potential fees and penalties for default as well as exit fees in the event of early repayment or refinance and ensure that such costs are factored into any refinance or payment decisions. Another key issue is to limit the timing of reviews of the facility and the ability of the lender to unilaterally change facility terms.
Maintain Communication With Lenders
- A good relationship with your lender and your relationship manager is essential to ensure that issues can be resolved quickly and minimise potential escalation.
- Review compliance with covenants to provide information to your lenders. Ensure that you have maintained full co-operation in supplying certifications, and documents and other requisite information (such as events which could materially affect either your business or the facility or changes to shareholders, or control of any corporate borrower or guarantor)
- Be aware that strict duties and obligations are imposed upon all directors of corporate borrowers. In particular, potentially serious consequences can flow if a company enters into further financial indebtedness when the company is unable to pay its debts / is technically insolvent.
TIPS WHEN REFINANCING OR OBTAINING ADDITIONAL FINANCE
- When approaching a lender ensure that you have clear strategic plans for the business.
- Be realistic about the asset values and earnings to ensure that they can support the level of debt proposed.
- Expect tighter controls and increased security to be a requirement of funding. As the market tightens and loan capital becomes scarce, lenders may well require added comfort for their exposure. This may take the form of security such as company charges, mortgages over freehold or leasehold interests, guarantees and charges over cash deposits. For commercial and residential developments you can expect to be required to achieve higher presale commitments and closer scrutiny of any sale process.
- Anticipate lower leverage and LVRs and higher rates and margins and factor these into any finance decision.
- Anticipate that valuations of any assets including freehold may be more conservative as valuers and lenders adopt a more conservative approach.
If in doubt, it is far better to seek legal and financial advice early rather than risk a situation becoming critical.
Maddocks can provide full professional assistance in all aspects of banking and finance as well as restructuring and insolvency.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.