Impact of coronavirus on financing documents and available relief measures

D&I Quarterly Q1/2020
Updated 6 April 2020

Posted on

26 Mar

2020

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D&I Quarterly

D&I Quarterly Q1/2020 brings together a selection of our experts’ articles published on our digital magazine Quarterly and here on D&I Insight.

For this Quarterly, we have put together the most current insight on the legal implications of the coronavirus outbreak. We hope that you will find these articles useful. Please be informed that all coronavirus –related articles will be regularly updated in our D&I Hub for COVID-19.

Dittmar & Indrenius > Insight > Impact of coronavirus on financing documents and available relief measures

The global COVID-19 outbreak is already having a significant negative impact on many industry sectors in Finland. Like many other countries, Finland has declared a state of emergency and imposed a number of social distancing measures, including travel restrictions, bans on public gatherings and partial school closures. As the outbreak also disrupts global supply chains, many companies are facing a significant loss of sales, which is raising concerns about liquidity and the ability to comply with existing financing agreements.

To soften the negative impacts of COVID-19 on the Finnish economy and to prevent bankruptcies of otherwise healthy companies, the Finnish Government and financial institutions have introduced a number of measures to provide additional liquidity and ease the companies’ financial situations.

Below we discuss some key conditions to borrowing under existing finance agreements, present an overview of the key relief measures currently available in Finland and consider the treatment of relief funding under existing loan agreements.

Borrowing under existing financing agreements

Borrowing under existing loan and revolving credit facilities is an option for companies that are able to fulfill the conditions for utilisation under the agreements or can agree on an amendment or waiver with their lenders. Typically, borrowers are as a condition for borrowing required to make certain repeating representations and confirm that no event of default has occurred or would result from the borrowing. Therefore, companies should carefully analyse their existing financing agreements and consider if there is a need to seek amendments or waivers.

No Event of Default

In order to confirm that no default or event of default (“EoD”) has occurred or will result from the borrowing, companies need to ensure their ability to comply with all EoD provisions despite the more challenging business environment. Generally, there are many EoD provisions that could be in risk of being breached, including financial covenants, misrepresentation, cross default, insolvency, material adverse change and in some cases even cessation of business provisions. Also, material third party contracts (including supply and commercial) need to be taken into account if there is a material financial risk due to non-performance or termination, e.g., as a result of a force majeure event.

You can find for more information on the interpretation of force majeure in commercial contracts in the context of COVID-19 here.

No MAC after most recent financial statements

Many loan agreements contain a business related material adverse change (“MAC”) provision requiring the borrower to represent in connection with a utilisation that no MAC in the assets, business or financial condition of the borrower has occurred since the date of the most recent financial statements. Although the threshold for a MAC is generally high, borrowers need to consider how materially their business and financial condition have been affected.

When analysing MAC provisions, attention should be paid to the degree of certainty that triggers the MAC provision and who is entitled to determine whether a MAC has occurred. If already circumstances that “might” occur trigger the provision, rather than the actual occurrence of the MAC, the provision is likely to be triggered earlier. Further, a common distinction is whether the occurrence of the MAC is determined by the lender in its sole discretion or by an objective test.

You can find for more information on the interpretation of MAC in relation to M&A contracts in the COVID-19 context here.

Financial covenants

To ensure continued access to loans and avoid an EoD, companies that have financing agreements with regularly tested financial covenants should closely monitor their financial covenant levels. In case there is a risk of breaching covenants or a possibility receive third party relief funding, the companies may consider pre-emptively to seek temporary waivers or amendments to their covenant levels to avoid an EoD or to create more capacity for borrowing base on available relief funding measures.

EBITDA adjustments

There is a possibility that the COVID-19 outbreak could permit certain EBIDTA adjustments as exceptional items, depending on the definitions used in the financing agreements. Companies with EBIDTA ratio based financial covenants should review the definition of EBITDA in their financing agreements to determine if there are addbacks that could be utilised to limit the covenant impact from lower EBITDA. For instance, COVID-19 related financial implications could fit the definition of “extraordinary, unusual or non-recurring charges“. Variations of the provision may include “expenses, losses, costs, items, lost profits, write-offs, lost revenues” which may be required to be “exceptional, infrequently occurring or one-off“.

Available relief measures

The Finnish Government has introduced a supplementary budget and certain financing, tax and employment related relief measures to facilitate companies’ access to liquidity and offer temporary relief from various payment obligations. The measures are implemented as temporary changes in legislation and will be carried out by state-owned financial institutions and administrative entities. In addition, a number Finnish financial institutions and pension funds have published relief measures that are being offered to clients. Apart from Finnvera’s guarantees to large corporations and TESI’s stabilisation funding for midsize companies, the financial relief measures currently available are mainly aimed at SMEs and micro companies. Tax and employment related measures are generally available to all businesses.

Financial relief measures

  • Finnvera, a state-owned entity for enterprise finance, acts in collaboration with the Finnish banking sector and has been mandated to offer SMEs and larger corporations a variety of guarantees and relief measures relating to existing loans from Finnvera.
    • Finnish SMEs and early stage companies (which have been operating for a maximum of three years) may receive guarantees aimed at securing up to six (6) instalment free months under their existing bank loans and/or obtaining additional working capital. Finnvera’s guarantee covers up to 80% of the loan amount and can be used for corporate bank loans of up to EUR 1,000,000. Finnvera’s recommendation is that companies wishing to obtain a Finnvera guarantee first contact their banks. The bank submits all applications regarding guarantees directly to Finnvera on the company’s behalf.
    • Large corporates affected by the COVID19 situation can also receive guarantees from Finnvera. The maximum guarantee coverage is 80% of the total liability and can be granted in respect of liabilities of up to EUR 30 million. However, Finnvera cannot become the main financier of the company.
    • For existing loans that Finnvera has granted, Finnvera offers a twelve-month instalment-free period, which can be applied directly from Finnvera. The measures offer relief for SMEs and some larger corporations.
  • Many Finnish commercial banks have informed that they, inter alia, offer their SME corporate clients instalment free months, rearrangements to amortisation schedules, increase to existing line of credits and working capital loans. The guarantees offered by Finnvera can generally be applied to obtain access to the relief measures from the commercial banks. The measures offer short term relief for SMEs.
  • The State Pension Fund of Finland (VER) increases it investment in Finnish commercial papers up to EUR 1 billion, which corresponds approximately 17-25% of the current Finnish commercial paper market. Commercial papers are short term bonds issued by Finnish companies with maximum maturity of less than 1 year. The measure offers access to working capital for companies with a commercial paper programme.
  • Business Finland, a state-owned innovation funding, trade, investment, and travel promotion organization, offers business disruption funding up to EUR 100,000 for SMEs employing 6-250 people and midsize companies operating in Finland whose business is impacted negatively by the COVID19 epidemic. Midsize companies are companies with a turnover or consolidated turnover of up to EUR 300 million. The Finnish Government has allocated an additional EUR 150 million for business support measures for SMEs and midsize companies operating in Finland whose business is negatively impacted by the COVID-19 epidemic. The funding is intended for tourism and tourism related services, creative and performing industries and all sectors where subcontracting chains are affected. Business Finland offers two different types of funding:
    • Funding for preliminary studies on business disruptions up to EUR 10,000 to be used for investigating and planning new business, alternative subcontracting chains and ways to organize production during and after the disruption caused by the COVID19-outbreak; and
    • Development funding for business disruptions up to EUR 100,000 to be used for carrying out development plans identified in the preliminary study or otherwise in the company’s operations to improve the company’s potential for success during and after the disruption caused by the COVID19-outbreak.

The Business Finland funding is subject to de minimis -rules (i.e. a company may receive only up to EUR 200,000 of funding of similar type during a two-year period and only EUR 100,000 if the company is operating in the field of road transportation).The measure offers small-scale emergency relief funding for SMEs operating in Finland.

  • ELY Centres (Centre for Economic Development, Transport and the Environment) offer relief funding of up to EUR 100,000 for companies whose business is impacted negatively by temporary market and production disruptions caused by the COVID-19 outbreak. The ELY funding is available only to companies which have a maximum of five (5) full time employees. In the aggregate, the Finnish Government has allocated EUR 300 million for business support through the ELY Centres. The ELY Centres offer two different types of funding:
    • Funding for preliminary studies on business disruptions up to EUR 10,000 to be used for investigating and planning new business and ways to rearrange of production and offered services; and
    • Development funding for business disruptions up to EUR 100,000 to be used for funding business reorientation, developing of the subcontracting network, rearranging of production, developing of products and services and to strengthen competence.

The Ely Centres’ funding is subject to de minimis –rules (i.e. a company may receive only up to EUR 200,000 of funding of similar type during a two-year period and only EUR 100,000 if the company is operating in the field of road transportation). The measure offers small-scale emergency relief funding for micro companies operating in Finland.

  • Finnish Industry Investment Ltd (TESI), a state owned venture capital and private equity company, offers relief funding up to EUR-10 million for midsize companies (turnover of at least EUR 10 million and number of employees over 50), which have temporary difficulties due to the COVID19-outbreak. Funding will be made available to companies that are, with the help of the additional funding, able to cope with the financial problems caused by the COVID19-outbreak. A condition for the funding is that the company’s business has been profitable before the start of crisis and has prospects to become profitable again after the crisis. The funding will be made as investments of EUR 1-10 million and will be made under the TESI’s EUR 150 million stabilisation funding program, which aims to prevent healthy companies from becoming bankrupt due to the COVID19 crisis. Detailed conditions for the funding are available on TESI’s webpage; the funding may be applied as of 14 April 2020.

The financing and stabilisation program complements TESI’s previously announced readiness to provide additional funding for companies owned by its funds and companies where it has direct holdings. The measures offer relief funding for midsize companies and companies directly, indirectly or partially owned by TESI.

Tax related relief measures

  • Corporate income tax prepayments can be lowered with simplified procedure. Due to the COVID-19 outbreak, the Finnish Tax Administration will now approve requests for changing (lowering) the income tax prepayments without needing to provide written explanations or interim financial statements, which would normally be required.
  • Tax payment arrangements will be subject to eased qualifying conditions and payment terms as of 25 March 2020 until 31 August 2020.
  • Lower late-payment interest rate for taxes in a payment arrangement. The rate for late-payment interest will decrease from 7% to 3% and will be applicable to taxes that fall due after 1 March 2020 (subject to approval of temporary legislative change).

Employment related relief measures

Pension insurance:
  • Pension insurance companies offer temporary three-month extensions to payments relating to employees statutory pension insurance (TyEL) contributions that fall due between 20 March 2020 and 30 June 2020.
  • Private sector employers are entitled to a temporary decrease of 2.6 % of pension payments. The temporary relief is intended to enter into force as soon as possible and in any case by 1 June 2020 at the latest and will remain in force until the end of year 2020.
Planned temporary amendments to employment legislation include, among others:
  • The shortening of notification period for lay-offs and for statutory employer-employee negotiations, to five (5) days.
  • Extension of employer’s lay-off right to fixed-term contracts.

In addition to the above relief measures, some private and public entities (such as pension insurance companies) as lessors and landlords have informed that they are flexible on payment terms relating to rents for business premises.

Temporary amendment to pension payments:
  • Pension insurance companies offer temporary three-month extensions to payments relating to employees statutory pension insurance (TyEL) contributions that fall due between 20 March 2020 and 30 June 2020.
  • Private sector employers are entitled to a temporary decrease of 2.6 % of pension payments. The temporary relief is intended to enter into force as soon as possible and in any case by 1 June 2020 at the latest and will remain in force until the end of year 2020.
Temporary amendments to employment legislation include, among others:
  • The shortening of notification period for lay-offs and for statutory employer-employee negotiations, to five (5) days.
  • Extension of employer’s lay-off right to fixed-term contracts.
  • Extension of grounds for termination during a probationary period.
  • Extension of the re-employment period for redundant employees who have received a notice of termination prior to 30 June 2020 to nine months.

You can find for more information on the New Temporary Legislation Regarding Layoff Procedure here.

In addition to the above relief measures, some private and public entities (such as pension insurance companies) as lessors and landlords have informed that they are flexible on payment terms relating to rents for business premises.

Existing financing arrangements and relief measures

When considering available relief measures in the form of loans, guarantees and/or other financial indebtedness, borrowers should carefully analyse their existing financing agreements – including in respect of financial covenants and the definitions of “Financial Indebtedness” and “Permitted Financial Indebtedness”. Typically, loan agreements allow loans, guarantees and/or other financial indebtedness from third parties only up to a certain basket limit. Therefore, utilising the relief measures may require that the borrowers seek amendments and/or waivers from their lenders to their existing financing agreements.

Large and midcap companies

Large and midsize companies that do not have access to the commercial paper market and are unable to receive relief funding from Finnvera or TESI are outside the scope of the bulk of the financial relief measures introduced by the Finnish government. These companies may need to (i) seek amendments or waivers to their existing financing arrangements; (ii) explore opportunities in the debt and equity market for additional funding; and (iii) to rapidly implement all available actions to cut unnecessary costs to adjust their business in the (temporarily) changed business environment. In addition, some companies and their owners may wish to consider (pre-emptive) equity injections to ensure compliance with financial covenants and meeting of liquidity needs. In such cases, companies should review the equity cure provisions in their loan agreements to determine the covenant impact of such injections.

Further information

D&I’s experts are happy to discuss any questions or concerns that you may have relating to financing, taxation and available relief measures.

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