Debt financing facilities: Staying ahead in the current climate

The geopolitical volatility that we are currently all living through can have a direct impact on financing arrangements both for lenders and borrowers across the GCC. It is critical that on whatever side of the table you sit on a financing, you have already started to take the necessary steps to anticipate areas within your financing documentation that have already or could become areas leading to covenant breach, should the current volatility continue.

In our experience, timely engagement between counterparties allows for practical solutions such as waivers and consents that preserve commercial relationships: Don’t leave it to when breaches may have been inadvertently triggered.

Clauses potentially under scrutiny

Most financing documentation will be bespoke and should be reviewed. Below are the types of covenants customarily contained in financing documentation that could more immediately be under stress:

“MAC” clauses and Force majeure

Material adverse change clauses, market disruption provisions and, to the extent applicable, force majeure language or similar protections may be relevant. Understand the scope of such provisions and whether they are capable of being invoked and what remedies may be available.

Covenant Thresholds

Borrowers whose operations, supply chains, or project timelines may be affected should consider whether any financial covenants, insurance covenants or other operational undertakings could lead to a breach of agreed thresholds.

Illegality

Illegality provisions, particularly where evolving sanctions regulations or other regulatory restrictions could affect a lender’s ability to continue funding or maintaining exposure or lead to increased costs provisions being invoked. It may be appropriate to consider whether advance waivers, consents, or amendments are advisable to preserve the stability of existing facilities.

Security and asset coverage

Parties should consider the resilience of the security package. In particular, parties may wish to monitor loan-to-value ratios where asset valuations could become more volatile, as well as compliance with insurance covenants, including the continued availability of required coverage and the scope of insured risks in the current environment.

Cross-default risk

Clients with multiple financing arrangements should remain mindful of cross-default provisions, which are often broadly drafted. Early review and coordination across facilities can therefore be important in mitigating contagion risk.

Proactive Engagement

Consents, waivers, and amendments.

Identify potential areas of concern. Engage in anticipation of these being triggered. Secure alignment on consents or waivers or amendments in advance. Avoid unnecessary defaults.

The Banking and Finance team at Hourani & Partners is closely monitoring developments across the region and advising on both preventative and responsive strategies. We can review existing facilities, assess potential covenant sensitivities, and consider contingency planning. Don’t hesitate to reach out should you need any advice.