On Coronavirus: Trade Finance Borrowers
March 20, 2020
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During these difficult times, many trade finance borrowers will quite rightly have concerns about meeting their payment obligations and want to understand their potential risks. This note aims to provide guidance on what borrowers should be considering. My general advice is to review the entire suite of trade finance facilities you have available to you and be prepared to have discussions with your financiers when necessary.
Liabilities under loan facilities
If you miss a scheduled payment under a facility, you are unlikely to be able to claim any special circumstances, however dramatic and unique, as an excuse. Typically, a loan agreement would only allow a few days grace period for material disruption to payment systems, so if you miss a payment, you are in default. A missed payment is the most serious event of default and is likely to be treated as such by your lender. If you know you are likely to miss a scheduled payment, take legal advice and speak to your lender as soon as possible.
Even if you are comfortable with your ability to make scheduled payments for the time being, you need to make sure that (a) you can continue to give representations and warranties when required under the terms of your facilities and to comply with the relevant undertakings (such as coverage ratios and financial covenants) and (b) no defaults or potential defaults are being triggered by the current events.
Non-payment, a breach of covenant, a misrepresentation or another default will allow lenders to exercise their rights; these include demanding early repayment of all outstanding amounts, enforcing their security or making a claim under directors’ guarantees. Even if a lender is not willing or ready to do that, they can still limit the availability of future drawdowns and are more likely to do so straightaway.
A default, or a potential default, under one of your facilities is likely to trigger cross defaults under all of your financings. It is therefore important to take legal advice and start talking to your lenders before any default occurs. At this stage, lenders may be willing and able to agree variations to the terms of your facilities. Remember, lenders will want to see a lot more information than usual, including a sensible business plan, to be able to take decisions, so be prepared to provide this information.
A lot of trade finance facilities are uncommitted and repayable on demand. While they do not typically include an extensive list of representations, warranties and events of default, the lenders may stop making any new drawdowns available at any time if they have cause for concern.
These facilities are typically reviewed by lenders on an annual basis. You need to check the next review date of your uncommitted facilities as this may become the time your lender wants to amend your available limits and security package – and you need to be prepared.
Receivables finance facilities
You will need to consider the availability of your receivables finance facilities (i.e. any facilities or programmes where a financier buys the debts owed to you by your counterparties). Most of these facilities and programmes are in respect of the trade transactions where you (the supplier and seller of receivables) have performed your contractual obligations. The financier is relying on your representation to that effect and the representation that the debt you are offering for purchase has become due and payable.
If your performance under the relevant contract has been affected, you may no longer be able to offer these receivables for purchase by the financier. If such receivables are purchased, the financier is likely to have recourse back to you.
Liabilities under trade instruments
Your bank may have issued trade instruments, such as letters of credit, bonds or guarantees on your behalf. At that time, you would have given the bank an indemnity covering such instruments. These may be backed by cash cover held by the bank or other forms of security. Remember that banks have to pay under these instruments upon compliant presentation of documents by the beneficiary (such as your supplier of goods or services) and at that time you will have to repay the relevant amounts to your bank (and they have a right to apply the cash cover they are holding). This is the case even when you are in dispute with the beneficiary and do not want the payment to be made.
If you find yourself in that position and want to find a way to stop the payment, seek legal advice about your options as soon as possible.
Force majeure and frustration of commercial contracts
Drawdowns under your trade finance facilities are likely to be transaction specific, financing individual transactions approved by your lender. If your counterparty under such a transaction claims force majeure preventing their performance of the contract or you want to claim force majeure because you are unable to perform, seek legal advice before doing so.
Under English law force majeure preventing a party from performing their contractual obligation is what the relevant contract says it is. You will need to review your contract to establish whether your specific circumstances are covered by the force majeure provisions and what procedure for invoking force majeure and consequences of doing so are set out in the contract.
If your contract does not have a force majeure clause, a party having difficulties performing its obligations may try to rely on frustration. It is very difficult to successfully argue frustration under English law, so seek legal advice if you or your counterparty intend to do that.
Quite often, insurance policies, once procured, are kept in the bottom drawer, rarely to be taken out, unless you need to make a claim. Now is the time to take them out and carefully review them. Your obligations may vary greatly depending on the type of policy you hold. Failure to comply with the terms of a policy may jeopardise your insurance cover just when you need it.
When reviewing your policies, you need to pay attention to any requirements to notify the insurer of circumstances that may give rise to a loss, even if at this stage no loss has yet occurred, and you are not planning to make a claim. Also, note any provisions of the policy which require you to mitigate losses. Your insurers may want to have their say in how you do that.
Your lenders are likely to have the benefit of your key policies as part of their security package, for example, by being noted as loss payees. You are also likely to have obligations related to maintaining valid insurance cover in your loan documentation and failure to do so will be a default under your facility.
Company directors may need to review their position carefully. During the time when a company is or is likely to become insolvent, directors may want to take separate advice about the risks of personal liability in the event of the company’s insolvency. You can find out more about this by reading a note by my colleague Jeremy Goldring on risks for management. You can find that here.
Please keep an eye out for government support schemes for small and medium sized businesses, or for specific industries, that are expected to be made available in the UK and overseas. Once the full eligibility criteria of these schemes are known, study them carefully, decide whether your company, or any of your businesses or subsidiaries, qualify and apply for any support you may need.
The current consequences of the pandemic are unprecedented in modern times. At this stage it is difficult to predict what approach the finance industry will be taking in response to it. Preparation is key. Make sure you have a good understanding of the terms of your facilities and be ready for conversations with your financiers.