A common clause in banking facility agreements is what is called a ‘material adverse change’ (‘MAC’) clause.
These clauses cover provisions for unpredictable events that could cause an adverse change in the borrower’s capacity to repay the loan.
Parties to commercial loan agreements may be facing increasing uncertainty in their ability to repay loans as a result of the economic changes caused by Covid-19. Where their financial agreement with the loan provider includes a MAC clause, there is a chance the lender may rely on this provision to call on repayment of the loan.
Whilst courts have yet to offer the same level of scrutiny to MAC clauses as they have with ‘force majeure’ clauses, this may soon change given the unique and exceptional impact of Covid-19 on global business across multiple sectors.
Many businesses across the travel, hospitality and retail sectors are likely to have loan or overdraft agreements with banks who will be anxious to protect themselves against risk and ensure debts can be recovered. If a commercial lender believes there has been a MAC in a borrower’s ability to repay the loan, it may call on further security (what a loan is secured against) or seek expedited repayment of any debts.
MAC clauses are common in commercial loan agreements and are normally drafted in a sufficiently broad manner to account for a wide category of circumstances and their resulting impact on the borrower’s business; and in turn the borrower’s ability to perform the obligations under the agreement.
MAC clauses may require a borrower to make representations to a lender that no MAC has occurred between the signing of the facility agreement and the first draw-down. Pursuant to this, banks and other lenders will then consider whether any events have occurred that may affect the borrower’s circumstances so significantly that the lender would call upon the security of the loan debt (‘MAC Event’). References to MAC Events in the definition of ‘Events of Default’ may form part of a bank’s minimum lending criteria under a loan agreement.
Parties seeking to invoke a MAC clause would need to demonstrate that an event sufficiently capable of bringing about material change to a borrower’s business has occurred.
In light of the Covid-19 pandemic, lenders and borrowers alike may be reviewing relevant provisions in facility agreements to determine whether any party has a right to call upon increased security or seek repayment under the facility agreement. This heightened scrutiny may be justified, considering the exceptional scale and impact of the current pandemic.
MAC Clause Guidance from the UK Courts
Court guidance on circumstances sufficiently capable of constituting a MAC Event and interpretations of the MAC clauses is limited in volume.
Interestingly, though, the leading case of Grupo Hotelero Urvasco v Carey Value Added SL and Another  EWHC (Comm) 1039 (‘GHU v Carey’) found that the occurrence of the global financial crisis and the related economic recession were in themselves insufficient in demonstrating that a MAC Event occurred. The Court further ruled that when seeking to rely on MAC clauses, lenders must prove that a MAC occurred in relation to a specific borrower’s ‘financial position’ significant enough to affect a borrower’s ability to repay the loan.
The following conclusions can be drawn on in the interpretation of MAC provisions:
- MAC clauses offer a contractual remedy, and clauses must therefore be sufficiently precise in their wording and desired effect;
- the impact of a MAC Event must not be temporary in nature, even if the duration of the MAC Event is itself short-lived; and
- upon a MAC Event occurring, the invoking party will need to provide evidence that would substantiate its reasons for seeking to rely on a MAC clause.
Guidance relating to Covid-19
Contracting parties will often seek to negotiate and agree the specific wording of MAC clauses in order to spread counter-party risk of default. Business owners presently reviewing their finance documents and risk exposure may wish to consider:
- whether the current impact of Government Covid-19 restrictions will have a lasting impact on their business’ liquidity;
- how soon certain restrictions will need to ease for the business not to suffer a lasting economic change which may affect their ability to repay the lender; and
- what evidence do they have on their financial position and their ability to commit to a structured scheme of repayments to a lender.
Borrowers with MAC clauses in their lending agreements should consider their specific wording and the ways in which they may be directly impacted by the Covid-19 crisis should a disagreement arise with the lender on a MAC Event. Clear communication with the lender regarding expectations may enable continued access to funds under the loan facility agreement, subject to any revised terms.
Seeking Legal Advice
In circumstances where a lender seeks to invoke a MAC clause in a loan agreement, we recommend that borrowers (where appropriate) focus on limiting the scope and definition of MAC to ‘current financial circumstances’. Such wording would keep the interpretation of a borrower’s ability to commit to loan repayments in line with proven financials, taken directly from verified financial accounts and reports, instead of speculative views held by a lender on markets generally.
In the absence of a MAC clause, a failure to meet loan repayments or exceeding an overdraft agreement with a bank will likely result in a lender considering calling on its security under an agreement. Businesses with ‘on-demand’ repayment facilities with banks, in particular, should consider any additional assets they may have available to provide as further security for continued lending.
Defaulting on repayments to a lender will result in attempts to recover the debt. While banks are likely to be increasingly wary of their risk exposure due to the economic impact of Covid-19, we encourage borrowers to seek legal advice at an early stage to negotiate with lenders for forbearance on calling on a debt’s security. If successful, this would allow borrowers additional time to restructure their assets and business approach, before full repayment is owed to the lender at a later date.
Please contact Tim Perry at [email protected] for further enquiries.