In view of the present coronavirus outbreak, it is of the utmost importance for lenders and borrowers alike to diagnose correctly the risks and challenges ahead for their business. Indeed, the crisis we are facing is more about solvency than liquidity as it will affect the real economy first.
With the spread of the virus, there is an acute risk of financial difficulties leading to default and bankruptcies in sectors most vulnerable to the virus, including maritime and air transport, retail, tourism, insurance and entertainment.
At this point, borrowers should be aware of the cash flow, debt and solvency risks to which they are exposed. In addition to solvency risk, lenders should be aware of asset protection risks and uncovered litigation exposure before resorting to restructuring measures or enforcement actions. To that end, lenders should closely monitor via contractual reporting requirements the ability of their borrowers to perform their obligations and the potential impact on the borrower's revenue and solvency risk. Borrowers should monitor the cash flow of their business on a regular basis in order to mitigate any financial difficulties and insolvency risks and determine if they could benefit from a cure period under their existing financing arrangements.
Lenders should examine the security packages for their lending deals and ensure that all security interests are properly perfected under relevant local laws and prepare a short-form summary of all guarantees and security interests in place and the available enforcement options.
See also our related articles Duties of director's in the wake of a liquidity crisis and Mitigation of director's liability in the face of hardship.
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