Coronavirus – the impact on corporate finance arrangements

Updated as of 14 May 2020

Coronavirus (COVID-19) is already having a significant impact on the hospitality, leisure and tourism industry. But with travel restrictions, supply chain interruptions and office closures, businesses in almost every sector could be affected. CFOs need to carefully manage any financial arrangements, be aware of their reporting obligations and understand how lenders will respond to events of default and material adverse change. These issues also translate into concerns for the lenders.

Even though the public is well aware of the Coronavirus outbreak and the impact it is having on businesses and the economy, PLCs and AIM listed companies need to be conscious of their obligations to disclose relevant ‘inside’ information such as adverse changes in the company’s trading performance as a result of Coronavirus.

It is not just listed companies that have disclosure obligations relating to the Coronavirus. The UK’s Financial Reporting Council (FRC) has recently written to companies to remind them of the need to include principal risks and uncertainties affecting the company’s business model (such as disruption to supply chains and reduction of consumer demand) in their annual reports.

The FRC has also reminded directors of the need to consider whether the balance sheet adjustments (or post-filing disclosures) need to be made as a result of the impact of Coronavirus.

Financing agreements typically include financial covenants relating to cash flow and other barometers of a business’s financial health. These financial covenants are tested on set dates throughout the year, however loan agreements generally include wide reporting obligations designed to ensure that lenders are made aware of financial concerns as early as possible. 

A failure to provide the required reporting information or a failure to make a repayment by the due date will often be an immediate event of default resulting in a ‘draw-stop’ under a revolving credit facility (preventing any further drawings being made under that loan) and result in the loan becoming immediately repayable. It may also, under any cross-default provisions, trigger defaults under other loans to which the business is a party.

Full disclosure and co-operation with lenders is usually the best policy.

Loans and other financing agreements will often contain ‘material adverse change’ clauses (MAC clauses) which allow lenders to call in loans in certain stated circumstances. These are generally wide in scope as they are intended to cover a risk that the parties cannot anticipate, such as the effects of the Coronavirus.

There is no standard format for MAC clauses – they are often heavily negotiated and end up being circumstance and industry specific. It has been held that for an event to be ‘material’ it must significantly affect the party’s ability to perform its obligations under the agreement and it must be more than ‘temporary’. It is not possible to say at this stage how long the Coronavirus and its consequences will last. In any event, enforcing a MAC clause will require careful consideration of the precise wording of the clause and the surrounding circumstances and, given the global nature of the effects, lenders are likely to be reluctant to trigger a default under the MAC clause.

Where a business is suffering financial difficulties as a result of the Coronavirus outbreak, it is likely that a lender will find it easier to rely on other contractual provisions, such as a breach of repayment obligations, financial covenants or reporting obligations, rather than arguing that a material adverse change has occurred. They may however allege a material adverse change has occurred to bring a borrower to the table to address any concerns.

Lenders are likely to be keen to engage with borrowers to help support the businesses and avoid further financial deterioration. In fact, it appears likely that they will be encouraged to do so by the government and the financial regulators. However, this will need to be balanced with the lender’s own financial considerations. Lenders will be keen to ensure that they are mitigating their risks by not having too much exposure in certain sectors which are likely to be significantly impacted by the Coronavirus outbreak. They will also want to ensure that pricing in financial deals reflects the value of the business having regard to the Coronavirus risk.


On 4 March, the UK’s Financial Conduct Authority (FCA) issued a statement on COVID-19 (this was updated further on 6 March). In the statement, the FCA explained that they (in conjunction with the Bank of England and HM Treasury) are working with financial service firms, industry bodies and trade associations to better understand the pressures they are facing as a result of the outbreak.

The FCA noted in the statement that financial service businesses are already expected to have contingency plans in place to deal with major events such as this and that firms should be taking all reasonable steps to meet their regulatory obligations. The FCA stated that it has no objection in principle to staff working from home or from backup sites but that firms are still expected to “be able to enter orders and transactions promptly into the relevant systems, use recorded lines when trading and give staff access to the compliance support they need”.

While the FCA’s statement relates specifically to financial service firms, all businesses should have similar contingency plans in place as part of their prudent business continuity measures.

Practical Steps

Businesses will need to consider the impact of Coronavirus on their existing financial arrangements, including their ability to comply with financial covenants and to pay scheduled repayments. Businesses should ensure that they are reviewing their contingency plans and updating them where required. Businesses should explore with their lenders and other creditors whether it is possible to restructure payments or postpone testing of financial covenants while the financial impact remains uncertain.


For more guidance, and further information, visit our Coronavirus hub.