Impact of COVID-19 on corporate financing transactions

By James Darcy, Alan Maxton, Tim Stewart, Mark Kidston, Karla Fraser, Shivagar Siva
Banking & Finance COVID-19 Financial Services Project Finance

In brief 5 min read

We are actively engaged with advising clients on the implications that COVID-19 will have on corporate finance transactions. Based on our discussions with market participants, we set out below some key documentation issues arising as a consequence of this global issue and our practical tips.

Separately, we have considered the impact that COVID-19 is likely to have on debt capital markets and offer both our analysis and practical means for responding in this related Insight.

Material adverse effect / material adverse change

A material adverse effect / material adverse change (MAE) clause is commonly negotiated between borrowers and lenders and customarily includes a material adverse effect or material adverse change on a borrower's business, operations, property, condition (financial or otherwise), prospects, its ability to perform its obligations or the validity or enforceability of finance documents (including any security documents).


Any lender thinking of calling a default based on a MAE will need to be comfortable that the present situation overlayed onto the borrower's current position constitutes a MAE under the finance contract. This can often be a challenge and experience suggests that lenders may be reluctant to rely on these provisions in order to call an event of default and accelerate any debt owed by a borrower or use these provisions as a default drawstop to funding, though it may remain an option for lenders in certain circumstances. Parties should be mindful of such provisions in their financing documents and give careful thought to them, particularly in the context of any refinancing transactions occurring during this period of uncertainty.

Force majeure and frustration

A force majeure clause is a provision which permits parties to suspend or terminate a contract when certain circumstances beyond their control make performance of the contract impossible or impractical. What events constitute a force majeure will depend on what parties agree when they enter into the contract, however, typically they include events such as flooding, earthquakes, changes in legislation or terrorist attacks.

Frustration occurs where subsequent to the formation of a contract and without fault of either party, the contract becomes incapable of being performed due to an unforeseen event whereby parties' obligations under the contract become radically different from those originally contemplated or are impossible for them to perform.


The legal onus of making a successful claim that COVID-19 results in a force majeure or frustration of a financing contract is high. Consequently, it would be challenging for parties to rely on such provisions to exit their contractual obligations. 

Force majeure and frustration provisions are often found in a borrower's supply and offtake contracts, which form an important part of a lender's security package. Accordingly, if a force majeure event or frustration of a borrower's high value or important supply or offtake contract were to arise, this could have a material implication on the borrower's ability to comply with financial covenants and other undertakings it has provided in the financing agreement.

Financial covenants and events of default

Financial covenants are undertakings prescribing that a borrower comply with financial ratios such as cover or gearing ratios, or preserve some other amount (eg have tangible net worth or shareholders' funds above a certain value).

Where a borrower breaches a financial covenant stipulated in a financing document, this would give rise to the lender calling an event of default, thereby accelerating the debt owed to it and permitting the lender to refuse to provide any further loans (or claim cash cover). The absence of an event of default is usually a condition precedent, meaning events of default act as a drawstop.


It seems that COVID-19 will have wide-ranging impacts across the globe, disrupting business as usual (particularly for travel businesses, airports, airlines), supply chains (particularly where these originate or are impacted through the areas worst hit by COVID-19) and general consumer behaviour. Consequently, the virus is likely to have an adverse impact on revenues and calculations of financial covenants that borrowers should consider. While projection of the impact on financial covenants may be challenging for borrowers, they should be carefully monitoring their compliance of financial covenants going forward to identify any potential future issues. 

Borrowers should consider:

  • when their next test and compliance dates fall;
  • the basis of calculation of covenants and how relevant definitions may treat the impact of COVID-19 on revenue and other financing metrics that may be adversely affected;
  • whether there are provisions in documents preventing breach through the contribution of 'equity', which in some circumstances can include subordinated debt; and
  • potentially the early engagement with lenders if covenant compliance may prove challenging.

Lenders should also be considering the basis of calculations, and potentially reaching out to clients in sectors that are likely to be worst hit by COVID-19.

Market disruption

A market disruption clause in a loan agreement is intended to protect lenders from circumstances where the cost to the lender of funding the loan rises above the benchmark rate for the loan. In those circumstances, loan agreements commonly provide that the interest rate is to be determined by the cost of funds of the lender.


Borrowers and lenders alike will need to continue monitoring the wholesale funding market,  particularly the actions of the relevant central banks. Borrowers should consider discussing the likelihood of this scenario occurring with their lenders.

Increased costs

An increased cost clause is a risk allocation provision which provides that a borrower shall indemnify a lender if the lender suffers an increase in the cost of a loan or a reduction in receivables under the loan due to a change in law, regulation or having to comply with any guideline or request from any central bank or other governmental authority.


Given that during the GFC such increased costs claims were generally not made by lenders, we expect that lenders are unlikely to attempt to pass on any increased costs to borrowers despite COVID-19, particularly given the likely relationship and reputational issues in attempting to do so. That said, borrowers should be mindful of such clauses and ensure they have provisioned for any such indemnity claim.

Navigating COVID-19

Head to our COVID-19 hub for more insights and analysis