Lender and Other Creditor Issues Amid the Pandemic

1.   Additional Draws On Revolving Lines of Credit:  Borrowers who are financially stressed and with revolving lines of credit can be expected to draw down unused availability on their existing lines of credit to provide additional liquidity and to deal with the loss of cash flow. Doing so may be a good business strategy, especially in this low interest rate environment, but it may lead to some tension between lenders and borrowers. For example, often a condition precedent for such a draw is the absence of any defaults under the applicable loan documents, so a borrower should act quickly before any financial covenant default arises due to declining performance. Lenders, on the other hand, should review their loan agreements to determine their obligations to advance funds in these challenging times, including carefully reviewing the scope of any of their “material adverse change” or “material adverse effect” terms. Borrowers should review these terms too, because often a request for a draw is an affirmative representation that no default exists or will arise as a result of the draw. Lenders may find that the only way to stop such a draw is to invoke such terms, but doing so on that basis alone may sour the relationship and could lead to future litigation and limited prospects for repayment.

2.   Forbearance:  We are seeing an increased interest in forbearance from remedies by lenders, landlords and other creditors facing payment defaults by borrowers and customers. As we mentioned previously, lenders, landlords and other businesses that extend credit may, as a practical matter, want to work with their customers in the hopes that circumstances improve in the future. Doing so also builds goodwill and avoids a loss of reputation in the marketplace that would arise from sending notices of default at this time. Some lenders, landlords and other creditors are offering forbearance for 30-90 days, with the possibility of re-evaluating or extending it as circumstances change. Many government-sponsored entities, such as Fannie Mae and Freddie Mac, have agreed to a 60-day moratorium on foreclosures and have instructed their servicers to pursue loss mitigation options. Finally, with many courts operating on a limited basis, issuing general administrative orders continuing existing matters and imposing moratoria on evictions and foreclosures, it will be difficult for lenders, landlords, and other creditors to pursue judicial remedies at this time.

3.   Insurance:  Lenders, landlords, and other creditors may want to condition forbearance or other relief on confirmation from debtors that they are pursuing all available claims under their applicable insurance policies. Lenders, landlords, and other creditors should also review their own business interruption and commercial property policies to determine whether they should make claims under them – we are happy to assist with any such review. All creditors should monitor their states’ legislative efforts to require insurers to pay COVID-19 claims.

We are here to serve our clients and assist them in navigating these uncertain times. Feel free to contact us if you need assistance with any of these issues or if you want to further discuss what actions you should be taking as a lender, landlord, borrower, tenant or other business that receives or extends credit.

If you have questions about this article, contact Steve Migala at 847-705-7555 or smigala@lavellelaw.com.