Covid-19: Immediately Review Your Credit Agreement and Financing Document

The review is important in deciding what steps to be taken in the future in order to mitigate risks arising from the spread of Covid-19.

The spread of the Covid-19 pandemic has greatly influenced financing projects in several industrial sectors. To minimize the negative impacts that arise, companies must know their financial capabilities based on current conditions and to understand the steps that must be taken in the future, a review of credit agreements and other financing documents is necessary.

The objective of credit agreements and other financing documents review is to determine the extent to which the Covid-19 pandemic affects the obligations of debtors, creditors and guarantors both in the short term and in the long term.

The Indonesian government itself has issued several regulations to maintain the economic and financial stability of businesses in Indonesia. For example, the Financial Services Authority (OJK) policy to provide economic stimulus so that banks will be able to maintain the quality of assets and the ratio of non-performing loans still acceptable. Up to the latest policy of Bank Indonesia (BI) to overcome the impact of Covid-19, which focused on maintaining monetary, financial and payment system stability, especially related to the stability of the rupiah.

In addition to the steps taken by the government, businesses themselves must also take steps to review credit agreements and other binding financing documents. The provisions that the company must consider in reviewing credit agreements and other financing documents are as follows:

1. Payment Schedule, evaluates whether the company will be able to comply with the payment schedule or not
2. Financial Provisions, assess whether the business operation can comply with financial ratios and thresholds, and whether it is possible to adjust these indicators according to the regard of the company.
3. Project Completion Provisions, consider whether the peak of project completion (e.g. completion of construction or deadline) is realistic in the current situation. For credit agreements that have a project deadline that must be achieved within a certain timeframe (for example, the time period for completing a real estate development facility), the deadline needs to be reviewed in relation to the impact of Covid-19.
4. Provisions on Default, identify what default actions that may potentially induced by the impact of Covid-19 (breach of agreement relating to business sustainability, financial ratios, or adverse material changes, changes in law, etc.). In the case where a business is restricted by reason of fulfilling public obligations to comply with the government, then the event should be categorized as a default or not, given the action “suspension” is the impact of the current Covid-19.
5. Provisions related to Loss and Security, this needs to be considered especially for collateral/security of receivables based on commercial contracts, review the impact of what are the risks or negligence in the performance of the underlying contract (for example, product sales, delivery of raw materials or spare parts, construction work), items that potentially affect the existence and value of the collateral security.
6. Provisions related to Collateral, review whether companies acting as guarantors or third party mortgages guarantor can meet the requirements of financing documents.
7. Force Majeure, review the provisions relating to contractual obligations and force majeure events in all project financing agreements to assess whether the company can claim force majeure and how this will affect ongoing projects.
8. Risk to the Supply Chain, assessing other elements of supply chain risk (e.g. partner behavior in commercial contracts).

Based on the items that need to be considered in conducting a review of the credit agreement or other financing documents above, the steps that are possible for the company to do in order to mitigate risk are as follows.

1.     Waiver Requests

Credit agreements usually provide the right to request a waiver of a potential default or potential default by a financing party, or to release the negative effects of a violation (for example default on interest payments). The waiver is usually given conditionally, and sometimes requires additional collateral for the financing party. This waiver request must be carefully designed and negotiated to avoid any negative impacts.

2.     Amendment

Credit agreements can be amended for adverse material change clauses; extension of due date, change in payment schedule, change in interest, adjustments to financial agreements, etc. Timely and careful preparation of negotiations is an effective key to a successful amendment of the agreement.

3.     Restructuring

If the review of the credit agreement leads to the conclusion that the Covid-19 outbreak can significantly affect the business and ability to perform payment obligations, then financial restructuring must be considered.

 

Conclusion

The Covid-19 outbreak caused business to reconsider and review all ongoing business agreements. The review is important to decide what steps to take in the future in order to mitigate risks arising from the spread of Covid-19.

 

Author : Andi Akhirah Khairunnisa

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