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24 March 2020

COVID-19: Managing Financial Covenants in a Downturn

Given that financial covenants are measured on a rolling LTM (last twelve months) basis, there is a time lag from a negative earnings development until an actual breach. For some of the industries affected, the COVID-19 earnings decline came overnight and with unprecedented force leading to potential defaults starting in Q3. Leveraged borrowers and their owners, including private equity sponsors, should prepare covenant management now. Options include waivers, new base case, covenant reset and cure. It is not all bad. We expect Danish bank lenders to be relatively flexible. One of the reasons is the interpretation issued by the Danish FSA on 19 March 2020, implying that banks granting temporary relief from covenant breaches are not required to make loan loss provisions. Financial covenants come in two shapes and forms: “Maintenance covenants” implies that a breach is an event of default triggering immediate repayment of the debt. “Incurrence covenants” implies that the borrower is restricted from taking up new debt, if by doing so the borrower would breach a covenant.

Henning Aasmul-Olsen

Partner

+45 30 37 96 50

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Andreas Selzer

Associate

+45 30 37 96 59

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Joakim Holdt

Associate

+45 30 37 96 21

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