Regulator urges lenders to carefully consider their responses to borrower's potential breaches of covenants owing to COVID-19
The PRA stressed in a 'Dear CEO Letter' that lenders should be flexible with regards to the breaches of covenants that might occur because of COVID-19. The PRA stated that breaches may arise owing to temporary changes to a borrowers' reported earnings, suspension of business or changes to the audit report attached to financial statements.
The PRA recognised that loan covenants are important to lenders' credit risk management, however, that such risk management should recognise the differences between 'normal' covenant breaches and ones that occur owing to COVID-19. The PRA have gone as far as to say that lenders should consider waiving such covenant breaches where appropriate, and notes that it expects lenders not to impose new charges or restrictions on borrowers following such covenant breach.
Practical considerations for borrowers
- Review and identify the relevant definitions and provisions of the loan – particularly relevant financial covenants may be those tested on a look-forward basis, including interest cover and cash flow
- Assess whether it is or may become necessary to request a waiver or grace period from the lender if a breach has occurred
- Evaluate whether the renegotiation of the covenants is necessary
- Find evidence to demonstrate that the potential breach of covenants is as a result of COVID-19
- Liaise with auditors regarding the timetable for audit reporting and how COVID-19 will affect the report
Read the aforementioned 'Dear CEO Letter' here.