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
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
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.