Reed Smith Client Alerts

With the end of the first quarter of 2020 and related financial covenant test periods fast approaching, borrowers must closely monitor the impact of COVID-19 on their business and take necessary action to manage cash flow.

Authors: Benjamin L. Brimeyer Elizabeth R. Tabas Carson Gerard C. Martin Aaron Javian David F. Hayes

Among other things, borrowers should pay attention to upcoming liquidity needs and should consider drawing under available revolver capacity while they can. In most cases, the potential for future noncompliance with a financial covenant will not limit the borrower’s ability to draw today. Borrowers should be mindful of representations and warranties that must be true upon each revolver drawing and should carefully review them to confirm that the impact of COVID-19 has not rendered any of them untrue in any material respect. Additionally, borrowers with asset-based loans will need to consider the impact that COVID-19 may have on the amount, valuation, and eligibility of their receivables and inventory under their borrowing base, and the potential effect on liquidity if a lender establishes or increases reserves against the borrowing base in anticipation of adverse changes. Finally, for credit facilities that have not yet closed, lenders may seek to introduce anti-cash-hoarding provisions that would limit or eliminate a borrower’s ability to draw funds and hold cash in anticipation of impending adverse events.

Client Alert 2020-095