COVID-19 | Legal Analysis Center
March 30th, 2020
Since the outbreak of the new coronavirus (COVID-19), the Firm has prepared a series of supplements on relevant issues to be considered by its clients.
In response to COVID-19, the Argentinean authorities undertook a series of measures based mainly on a mandatory quarantine until 13 April. In this context, it is questionable what the economic impact of these measures will be, and how they will affect local companies that were already operating in a dramatically slowed down economy before their enactment. We will analyze here the situation of international financing granted to the local private sector, and how the lenders or borrowers of these loans can protect themselves from a context that will impact on the ability of many of these borrowers to comply with their obligations. Although the Central Bank of Argentina (Banco Central de la República Argentina – BCRA) anticipated a series of measures aimed at mitigating the impact of COVID-19 on local financial obligations, the situation regarding private sector external indebtedness has not yet been affected by local regulations. In this supplement, we will tackle some relevant issues in view of the extraordinary situation that Argentine companies are going through, in order to provide our clients with the basis to analyze each of their Argentine projects in light of COVID-19 and to early determine on the appropriate measures and actions to overcome the crisis.
- Regulatory Integration (Local and Foreign law)
The vast majority of international financing is governed by foreign law (e.g., New York law, English law, etc.), although collateral agreements and some ancillary documents are governed by local laws. In the face of a crisis that leaves local borrowers subject to local emergency legislation, there is no doubt that a correct analysis must “link” all regulatory frameworks. Therefore, the COVID-19 becomes a “practical” issue that exceeds the wording of agreements and applicable law, limiting or preventing in some cases the local debtor from fully complying with its obligations, even if under foreign law it is compelled to do so. A default under New York law may be declared on the basis of agreements that, for example, do not regulate force majeure or act of God events, but there will surely be serious obstacles to the enforcement of a local guarantee that would allow the Argentine debtor to defend itself behind such principles. This is without considering the risk that – should the economic situation worsen – rules will be issued limiting the enforcement of security, without differentiating the applicable law. President Fernández issued Presidential Decrees on 30 March freezing certain rents and mortgage payments, and prohibiting certain foreclosures.
- Force Majeure, Act of God
Force Majeure or Act of God events are not usually specifically addressed in international credit documents that are often governed by foreign law, although this is more extensively covered in accessory agreements governed by local law (e.g., security agreements). This issue is highly sensitive since it involves situations that can be raised bilaterally, both by debtors seeking to be released from liability and also by creditors to mitigate risks (excluding from the borrower’s contractual spectrum the power to invoke those defenses). Although a situation such as this is not extremely serious in the case of a security (e.g. pledges, mortgages), it is so in the case of receivables-based collateral, for an abrupt slowdown of such receivables flows will necessarily impact the financing structure (e.g. by increasing risk, diminishing the effectiveness of the collateral, altering collateral-to-loan or other ratios, etc.), and it is necessary to define and adopt protective measures beforehand. A possible suspension of infrastructure works financed through complex project financing is also expected, for which factors such as construction times, start-up, risks of early termination or flows from the operation of the service have been critical. There have already been cases in which the qualified labor required for the construction and start-up of certain works have had to return to their home countries of origin as a result of the COVID-19, forcing a mandatory suspension of tasks and possible non-compliance that will impact these projects and their different components (including cross-default scenarios), which makes it critical to clearly determine the situation and adopt immediate actions. Our firm has dealt with this matter in other supplements which are briefly referred to.
- Material Adverse Change (MAC)
The identification of situations likely to materially affect a debtor’s ability to meet its contractual obligations is one of the most sensitive contractual issues in international loan agreements. Therefore, it is worth asking whether the COVID-19 (and its dramatic consequences) constitutes one of the so-called “Material Adverse Changes” (MAC) or whether it could generate a “Material Adverse Effect”, since it would or could realistically (“materially”) affect the capacity of Argentine debtors to comply with debt commitments abroad. The concept not only covers the debtor’s capacity to honor its foreign creditor, but also the impact that such circumstance could have on its business or assets. While for the debtor these provisions allow it to defend itself in a context of generalized crisis, the creditor is allowed to suspend an outstanding disbursement, protecting its exposure, or also to decree an acceleration of terms and the enforceability of the loan repayment (although in the latter case, it will be highly unlikely that a court would allow such a claim in the face of a global catastrophe such as the COVID-19).
- Business Days
Although not with the high sensitivity of other aspects, the fact of not having banking services would directly affect the fulfilment of payment obligations. In practice, business days are defined by reference to banking days in New York or London, although in many cases, local borrowers negotiated the acceptance of its place of business as a determining element to avoid being unable to comply during local holidays. Thus, a day declared as a non-business day in the borrower’s home country will suspend the enforceability of payment obligations until the next business day. Although the emergency legislation decreed as a result of COVID-19 in the country has provided for a series of measures related to banking activity, it has not meant its complete suspension, and the remotely continuity of service provision has been instructed; however, some dates have been decreed as non-working days.
- Reporting Requirements. What and How to Inform
Most international financing agreements subject borrowers to strict disclosure obligations. In this regard, the COVID-19 crisis triggers a series of circumstances that local borrowers must report to their lenders. Thus, even when they report publicly known facts, proper compliance with information commitments will avoid having to divert resources to correct these breaches. It is therefore critical to analyze each requirement, and jointly determine the form and content of each communication.
- Other Commitments (Covenants; Sub-loans)
International financing agreements impose, over and above traditional obligations, a complex series of commitments derived from the very nature of development loans, and which ensure the integrity of the economic communities receiving such funding. They usually carry environmental, social (the core of the emergency legislation) and other obligations which are likely to be breached as a result of the crisis. The situation calls for a thorough review of each commitment in order to determine the course of action.
In addition, Development Financial Institutions (DFIs) often provide lines of credit to local banks to enable financing to SMEs that would not be able to access external financing. The recent green bonds issued by some banks are an example of this operation. The bank’s sub-loans with its clients are subject to parallel agreements with the original loan, in order to allow the entity to “match” its commitments with DFIs. The SME sector is a more vulnerable sphere exposed to COVID-19, where generalized defaults could occur and impact the entire structure (sub-loans and main loans). Therefore, the analysis of each structure and the adoption of measures to face the crisis in an “integrated” manner is highly advisable.
- Receivables-based Collateral
Many major international financings, especially project financings, have guarantees associated with collection flows (e.g., fees, taxes, tolls, etc.) (account receivables), which in exceptional circumstances such as the present one may be compromised. Thus, with respect to this type of guarantees, it is necessary to assess, for instance, (i) whether and to what extent the industry or sector was or will be affected, (ii) what the specific impact will be on particular receivables flows, (iii) what contractual provisions will be applied and (iv) what other guarantees associated with the financing allow balancing the collateralization index (collateral-to-loan value) to overcome the crisis.
- Cases of Insolvency
It is important to determine the consequences that COVID-19 could have in cases of insolvency, especially those with open legal proceedings. The court holidays decreed in the emergency legislation will cause delays that will not only be reflected in longer resolution times, but also in less chances in favor of companies in difficulty to overcome the crisis and aspire to maintain their existence. It will be extremely important to identify and specify these delays, the resources to deal with them and the associated risks.
Each project will require a specific analysis, without prejudice to finalizing this first approach with a series of recommendations aimed at allowing a better and earlier positioning in this unprecedented crisis:
- Analyzing each project in its entirety, reviewing the whole contractual network
- Defining applicable legislation and coordinating inter-jurisdictional advice
- Reviewing specific clauses for crisis situations (e.g., outstanding disbursements, loans in execution, insolvent debtors, duty of information, extraordinary measures, etc.)
- Considering the invocation of force majeure or act of God events, unforeseeability or application of MAC
- Assessing the impact of the crisis on each project in terms of cost and time
- Assessing a mitigation plan until the crisis has been completely overcome
- Properly register the mitigation measures to be adopted during the crisis
- Verifying contractual deadlines to determine the viability of crisis measures
- Identifying the defenses each borrower could use
- Determining which commitments must be fulfilled during the crisis, agreeing on formats and deadlines between the parties to avoid situations of technical default
- Determining a contingency plan for distressed projects or customers
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