Will Banks Exploit the Fine Print to Restrict Lending?

With the market meltdown, companies are worried that banks will invoke so-called material adverse changes clauses to get out of committed, but undrawn, lending facilities.

T. Narayan/Bloomberg

T. Narayan/Bloomberg

Banks and other lenders used esoteric jargon to get out of funding agreements during the global financial crisis. Now private equity firms, afraid the banks will leave them in the lurch again, are encouraging their portfolio companies to draw down on their revolving credit lines just in case there is a repeat of 2008.

Lending contracts contain clauses outlining material adverse changes, or MACs, under which they no longer have to commit to financing. These clauses require counter-parties to ensure that there have been no events or developments — such as the global outbreak of the novel coronavirus — that would materially affect the business.

In the current markets, however companies’ access to cash can be the difference between survival or failure.

“We’ve already noticed that some clients in private equity were advising portfolio companies to draw down on their revolvers,” Andrew Glenn, partner at law firm Kasowitz Benson Torres, told Institutional Investor.

“That was made in anticipation that there would be a credit crunch or an argument that a MAC would allow banks to stop funding revolvers,” he added. “It looked like that would happen just like we saw in the Great Recession: that banks might act opportunistically.”


In 2008, these clauses starved already struggling businesses of cash.

Glenn explained that there is an increased risk that banks and other lenders would use these clauses now as a way to exit transactions they believe are suddenly unfavorable.

“In the last cycle, we saw banks that didn’t like the terms of a loan and then used the Great Recession and MACs to get out of a deal, or play stick up to the borrower,” he said.

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Glenn said the most activity will likely hit struggling airlines, hotels, casinos, and the hospitality industry in general. But he said he’s also gotten calls from businesses in other sectors as well, particularly as the business shutdown has cascaded to broad swaths of the economy.

In a report from Covenant Review published on Wednesday, the credit research firm argued that MAC clauses can be written very differently and that contracts need to be closely analyzed. The Covenant Review report addressed whether lenders can refuse to fund borrowing under committed but undrawn credit facilities.

“In the U.S., the primary concern is whether revolving lenders must fund committed but undrawn facilities in the midst of deteriorating market conditions,” according to the report. “The implications of the coronavirus (COVID-19) outbreak on potential, committed, and existing leveraged financings remains a critical issue for the global financial markets.”

Glenn said he and his partner Marissa Miller successfully fought what they thought of as abuses in 2008 and 2009 and ultimately were successful in getting lenders to honor their lending commitments.

“We’re at the beginning of this,” said Glenn. “We’re all economic actors and people will act in way to protect their interests for better or worse.”