Firms seek relief on loan contracts
Businesses are seeking concessions on repayment timelines amid worries of erosion in earnings
MUMBAI: Companies in India are revisiting their loan contracts and seeking concessions from lenders on repayment timelines and financial covenants as they worry about a sharp erosion in earnings because of strict restrictions during the nationwide lockdown.
The financial impact is being felt across sectors, as evident in a survey conducted in May by Confederation of Indian Industry (CII) among 300 companies.
The survey, which was released on May 2, showed that 65% of the companies expect revenues to decline nearly 40% in the June quarter. This will severely impact the ability of these companies to maintain the financial parameters promised to lenders.
Given these challenges, many companies are going back to lenders to renegotiate their loan agreements as they fear they may not be able to adhere to certain financial covenants due to disruptions caused by covid-19. Financial covenants in loan contracts are based on achievement of certain prearranged financial projections, which are tested on a particular date, usually on an annual basis.
These loan terms commonly include hitting financial ratios such as the ratio between net debt and earnings before interest, taxes, depreciation and amortisation (Ebitda), debt-to-equity ratio, interest cover ratio, debt service coverage ratio and fixed asset coverage ratio.
If the borrower fails to meet these targets on or before the reporting date, the lender could accelerate the loan repayment cycle or recall the loan facility.
“In a loan agreement, force majeure events such as the ongoing pandemic crisis typically do not give any relief to the borrowers from their repayment obligations. Therefore, borrowers for whom the testing date is near are now approaching their lenders to request them to not call any defaults or any breach of financial covenants,” said Siddharth Srivastava, partner at law firm Khaitan and Co.
A force majeure implies disruption caused by an unanticipated and chance occurrence beyond the control of either party.
Experts believe that most lenders will take an accommodating stance on covenants, given the market conditions.