The continued uncertainty surrounding U.S. tariffs and Canadian countermeasures has created significant financial pressure for many Canadian businesses. If these measures remain in place, some Canadian businesses may experience declining revenues, increased operating costs, reduced liquidity and disruptions to their supply chains. These financial impacts can have serious consequences for borrowers including temporary breaches of financial covenants, failures to satisfy liquidity tests included in a loan or other credit instrument or lead to concerns about the borrower’s ability to meet future loan payments.
Why borrowers should act early
Lenders generally dislike surprises and are more often willing to work with borrowers who identify the problem early on, provide a credible explanation and propose a solution before the breach occurs. Early engagement can preserve options and improve the likelihood of reaching a consensual solution with the lender.
Ideally, borrowers should initiate these conversations as soon as financial stress becomes apparent. Early engagement signals good faith and transparency which are crucial to maintaining a productive borrower-lender relationship. This resulting goodwill can translate into more favourable treatment towards the borrower and also provides the borrower stronger negotiating power than after a breach occurs.
Recommended measures for borrowers
A variety of tools may be available to stabilize the borrower-lender relationship and address a potential default. A non-exhaustive list of options includes:
- obtaining a waiver of an existing or anticipated default;
- negotiating amendments to the loan agreement or financial covenants;
- implementing an equity cure;
- providing additional security;
- entering into a standstill agreement;
- negotiating a forbearance agreement;
- refinancing all or a portion of the indebtedness;
- restructuring payment obligations or repayment schedules; and
- pursuing other restructuring solutions tailored to the borrower’s circumstances.
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.
[View Source]
