What's Trending – COVID-19 Liquidity Facilities

Given the extraordinary and uncertain situation that businesses face in Australia, we are seeing an understandable push by businesses to put in place additional committed liquidity facilities to provide them with access to additional cash, if needed, to allow them to continue operating through the affected period.

General liquidity in the Australian loan market remains good – assisted by the Reserve Bank's initiatives to provide Australian banks with access to cheap funding – and a willingness by banks (and many credit funds and institutional direct investors) to continue to responsibly support businesses during this time. (Please refer to our article "The Reserve Bank of Australia has announced a $90B facility for Australian Banks – what to consider?" for further details in relation to the Reserve Bank's efforts to maintain access to credit in the current environment.)

Some of the trends that we are starting to see emerge in relation to these types of facilities at this early stage include the following:

1. Increase to existing facility limits / new facility limits: New facility limits or an increase to existing facility limits, with, in some cases, staged access to these facility limits to account for the uncertainty around the period of time it may take for normal trading conditions to resume. In this regard, access to these facility limits has been staged with reference to the period that operations continue to be affected. We have seen these staged periods currently range from 3 – 6 months.
2. Term: Where existing facilities have been increased, borrowers are generally seeking to extend current maturities across all of their facilities. Where new facilities are being established, we are seeing the maturities vary a little, with some being structured as 'bridging' style facilities with slightly shorter tenors (18 months – 24 months), while others are being structured with slightly longer tenors (3 years or, in some cases, longer).
3. Deferral of principal and interest payments: Generally speaking, these facilities are being structured as revolving credit facilities (with no amortisation) with some flexibility around payment terms with full or partial deferral of interest payments for up to 12 months (with interest capitalisation at the election of the borrower) and cash sweeps.
4. No distributions / further tightening of terms: In general, borrowers are agreeing not to make distributions (or agreeing to tight restrictions on distributions) for up to 12 months.  Other areas coming under scrutiny by lenders for tightening – particularly for sub-investment grade credits – are narrowing the "permitted baskets" in relation to cash that can otherwise be deployed to loans out / financial accommodation, joint ventures, and for acquisitions. That said, these asks are proving not to be too controversial for borrowers, given that they are generally seeking to preserve liquidity at this time in any event.
5. Financial covenant testing holidays: In some cases, testing of financial covenants (and, in some cases, provision of valuations) is being switched off for up to 12 months. However, this is very much on a case by case basis, and in many contexts, as the full impact of COVID–19 on earnings for the current period and next few quarters cannot be re-forecast with any accuracy, many borrowers are approaching lenders initially with requests to manage liquidity, on the understanding that subsequent consent processes will be required to manage financial covenant holidays.
6. Equity cure regimes: Where not otherwise already available and where financial covenant testing holidays are not available, borrowers are seeking equity cure regimes for financial covenant breaches.
7. Security / enhanced credit support: In some cases where facilities have been previously unsecured for investment grade credits, lenders are requiring either partial or full asset security as conditions to agreeing to put in place the liquidity funding. For existing secured credits, in some cases, the new facility lines are being required to rank "super senior" (ie a priority application in any enforcement proceeds waterfall) to the existing secured / pari passu facilities and hedging, in order to attract the required additional liquidity.
8. COVID-19 carve outs: In some facilities, specific COVID-19 carve outs have been included to qualify certain defaults and drawdown requirements.

These types of facilities are providing certainty of funding to businesses in these uncertain times.

Authors: Brenton Key (Partner), Martin Coleman (Partner), Jamie Ng (Partner), Shawn Wytenburg (Partner), Steve Smith (Partner), Jock O'Shea (Partner), Ken Nguyen (Partner), Ken Tang (Partner) and Madeleine de Garis (Partner).