COVID-19 requires a renewed focus on banking MAE clauses

Lenders are not obliged to fund requests for new drawdowns if an Event of Default is subsisting or if a representation is incorrect.  This “drawstop” will typically be triggered if the Lenders consider that a “Material Adverse Effect” has occurred and is continuing.  To date, New Zealand Lenders have been reluctant to call upon such measures following the COVID-19 epidemic.  However, that could change in the near future – particularly if bank liquidity keeps tightening and needs rationing.

Sponsors and Borrowers currently entering into new commitment documents or loans to finance acquisitions need to pay particular attention to how the MAE provisions in their finance documents are drafted.

For businesses adversely effected by the COVID-19 circumstances and the Government’s response, they will want to make it clear that the current circumstances surrounding the COVID-19 epidemic cannot be made to establish an MAE at any stage in the future (i.e. including if/when the country moves down, or potentially back up, the Government’s COVID-19 alert levels). The justification for this request is that MAE requires a “change” in circumstances and that Lenders are already aware of the COVID-19 pandemic and how it could impact on the borrower’s business.

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