“Material Adverse Change” Clauses in Financial Documents and COVID-19


Under these circumstances, many companies seek their contractual remedies and seek legal advice on whether obligations that have become onerous could be terminated or suspended on the basis of force majeure ordinary clauses or principles of contract law such as breach of contract.

From the point of view of debt financing, the closest corollary we have to a force majeure provision is the “material adverse change” clause. So to what extent could a lender rely on a “mac” clause to exercise their typical remedies under a loan agreement following a material adverse change caused by the pandemic?

Material adverse change in financing documents – summary

It is not at all typical to see a force majeure provision in a loan agreement. In large part, this is because the contractual remedies arising from a loan agreement are different from those under ordinary commercial contracts. While termination rights are essential in commercial contracts, in a loan agreement the primary remedies for default are the acceleration of debt owed or the imposition of a lottery on any available facility. It would therefore be necessary to write a force majeure clause as an event of default and this just isn’t seen in most financial documents – it’s just not the market.

However, the “mac” clauses are very de rigueur in debt markets and, in a typical loan agreement (including all loan agreements in the form of LMAs (other than LMA investment grade models in some specific cases)), one will encounter “mac “In the following circumstances:

1. First, as a specific fault event triggered, generally, if a significant adverse effect (as defined) occurs.

2. Second, as a representation and guarantee made by the borrower in connection with its last set of audited accounts – for example “there has been no material adverse change in the financial position of the borrower since the date of the last audited financial accounts provided to the lender “.

3. Third, as a qualifier for certain commitments and representations and guarantees given by borrowers – for example “the borrower does not violate any [material contract] where such a violation would reasonably be likely to give rise to a material adverse effect “.

In the context of Examples 1 and 3 above, a fairly typical definition of material adverse effect would be:

“Significant adverse effect” ways [in the reasonable opinion of the Majority Lenders] a significant adverse effect on:

(a) [the business, operations, property, condition (financial or otherwise) or prospects of the Group taken as a whole; or

(b) [the ability of an Obligor to perform [its obligations under the Finance Documents]/[its payment obligations under the Finance Documents and/or its obligations under clause [ ] (Financial commitments)]]/[the ability of the Obligors (taken as a whole) to perform [their obligations under the Finance Documents]/[their payment obligations under the Finance Documents and/or their obligations under clause [ ] (Financial commitments)]]; Where

(c) the validity or enforceability, or the effectiveness or rank of any Security granted or purported to be granted under one of the Financing Documents or the rights or remedies of any Financing Party under one of the Financing Documents.]

The consequences of a breach of an undertaking or a misrepresentation arising from a “mac” provision will be that there will be an event of default (usually after the expiration of a short grace period for redress) . If there is a “mac” default clause event and it is triggered, then there is clearly an immediate default event. In both cases, the lender is likely to have one or more of the following remedies:

1. First, the right to accelerate the repayment of loans so that they are repaid immediately on sight and not on the contractual deadlines provided for.

Second, the right to impose a drawdown on the facilities so that the borrower can no longer draw on them.

3. Third, the right to charge default interest (although this right often only applies to unpaid amounts rather than the mere occurrence of an event of default – i.e. the lender accelerates the reimbursement and that there is then a default in payment of the sums requested).

Could the pandemic result in “material adverse change”?

There is no doubt that the pandemic and the government actions that followed have had material damage for many businesses around the world. In a British context, the pandemic is accelerating and thus putting enormous pressure on the NHS. The UK government therefore imposed a ‘lockdown’ whereby many businesses were forced to close their doors to further trade, and gatherings of two or more people were banned altogether (except when it was a case of a family unit living in the same house). Indeed, each individual must isolate themselves if they show symptoms and practice social distancing if they are not subject to strict rules as to when a person can leave their home. It doesn’t take too much imagination to imagine the extent of the damage this will cause to many businesses, regardless of the emergency economic stimulus packages put in place by the UK government.

The most stressed businesses may later find themselves under pressure from their lenders, especially if there have been past defaults and renewals unrelated to the pandemic. Would it be possible for a lender to seek to assert its rights under a loan agreement on the basis of a typical “mac” clause and before another default occurs, such as a non-? payment or breach of a financial commitment?

The answer to this question is “it depends”. In my opinion, the following elements must be taken into account:

1. Is the “mac” clause in question specifically triggered by a plague, pandemic or subsequent government action? In other words, are there specific provisions clearly indicating that the occurrence of such events will be considered a “material adverse change”? If this is the case, it is likely that a lender can rely on this specific wording to apply it. However, a “mac” clause containing such wording would be very unusual in our experience. Such a wording would be more typical of a force majeure clause.

2. Typical rules for “mac” clauses. The following general principles (among others) have emerged from the case law on “mac” clauses following the financial crisis from 2007 to 2009 and its aftermath:

a. The event invoked must be specific to the borrower in question and, in the absence of specific wording (see point 1 above), a lender will not be entitled to rely on unfavorable events suffered by a more large or an economy or a country as a whole.

b. The event invoked must not be transitory and must give rise to permanent or long-term damage.

These general principles seem to point to a conclusion that the pandemic cannot be invoked to trigger a “mac” clause since (a) the pandemic is an event affecting the country and the economy as a whole and is not specific to a particular borrower; and (b) the pandemic is, we all hope, a transitional event. However, I think a lot will also depend on whether the “mac” clause is worded in objective or subjective terms.

3. Is the “mac” clause worded in objective terms? In other words, does the lender have the discretion to make the “mac” determination in the sense of “an event or circumstance occurs which, in the [reasonable] lender notice, has a material adverse change on… .. “If the bold italicized text (or similar wording) is not contained in the” mac “clause, then it is worded objectively. In these circumstances, the lender should establish the “mac” as an objectively verifiable fact and the burden of proof is quite heavy. There is no doubt in these circumstances that the general rules relating to “mac” clauses set out above apply and, therefore, it is likely that the pandemic, by itself, could not be invoked to trigger a “mac” clause.

4. Is the “mac” clause written in subjective terms? In other words, does the “mac” clause contain wording giving the lender the discretion to make the “mac” decision by following the lines of the bold italicized wording in paragraph 3 above? If so, then the point is that the “mac” clause grants a large degree of autonomy to the lender, who almost becomes judge and party in his own case. It is true that adding the word “reasonable” here would add some protection and introduce an element of objectivity to the analysis which could therefore be the subject of forensic analysis. However, in my view, the word “reasonable” does not add much more protection to the standard of reasonableness that would apply in the absence of the characterization of “reasonableness” in an entirely objective clause. This standard is sometimes referred to as the “Wednesbury” or “Socimer” of reasonableness (according to the prevailing case law) and this essentially means that, in law, the holder of contractual discretion must not act in a capricious manner. and must not come to a decision so unreasonable that no reasonable person could have come to the same decision. Given the current circumstances, it is at least debatable that the “Wednesbury” / “Socimer” reasonableness protections would not be triggered if a lender determined that a “pim” had occurred on the basis of the current situation in regarding the pandemic.


I have long been of the opinion that borrowers should accept nothing other than quite objective language in “mac” clauses and the current circumstances do nothing to dissuade me from this opinion. It seems reasonably probable from the case law that, in the case of a fully objective “mac” clause, this clause could not be triggered by a lender solely because of the pandemic. The position becomes less clear where subjectivity has been drafted in the “mac” clause; the protection afforded to lenders by subjective language cannot be overstated.

That said, the fact remains that “mac” clauses are often invoked as a last resort by lenders relying on poorly drafted loan documentation that has not been triggered by other default events. obvious such as the violation of a financial covenant. In this context and given the prevailing market conditions following the pandemic, it is surely only a matter of time before EBITDA-based covenants or cash flow measures (such as leverage, interest hedging or cash hedging covenants) or covenants based on the balance sheet or asset values ​​(such as net asset value or loan / value covenants) will be triggered. As a result, many lenders may be biding their time rather than taking unnecessary and perhaps hasty action on the basis of nebulous “mac” defaults.

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