LMA-Style Loan Agreements and COVID-19 in Oman

In the current unprecedented times of COVID-19, with many businesses shut down or with reduced ability to operate, supply chains disrupted and little or no customers for many services and products, cash flow is a critical issue. In addition, the price of DME Oman oil is less than USD 25 per barrel which has put even more pressure on the Omani economy and especially companies in that sector. Therefore, many businesses will be considering how to best utilise any existing banking facilities they already have in place.

This article discusses the key issues for borrowers and lenders to consider based on a LMA-style-loan agreement which is governed by Omani law. Please note that each loan agreement will have been individually tailored for the borrower and negotiated to reflect its business, therefore each loan agreement will need to be reviewed to check the specific wording of that loan facility and the particular circumstances of that borrower. Both the borrower and the lenders needs to be aware of the contractual position, including their rights and obligations, under the relevant loan agreement.

First we consider drawdown on existing facilities under a loan agreement, then key terms to be checked in existing loan agreements and lastly we consider how the loan agreement and the various actions of Government ministries and the Central Bank of Oman in relation to COVID-19 interact.

Drawdown on existing facilities

Some borrowers are already drawing down to the maximum any additional funds available or any revolving credit facilities to deal with the anticipated times ahead. Before any such drawdowns, the loan agreement should be reviewed. In such case, the borrower would need to submit a utilisation request to the lenders, requesting the drawdown of a loan. This utilisation request includes a statement that any further conditions precedent are satisfied on the date of such utilisation request. Such further conditions precedent may include:

• a no event of default condition on any drawdown. A potential event of default usually causes a draw stop for new loans and an actual event of default a draw stop for rollovers for a revolving credit facility. Therefore, the borrower will need to assess if there has been a potential or actual event of default under the loan agreement, depending on the type of facility it has;
• the borrower confirming that the repeating representations are true in all material respects on the date of the utilisation request and the utilisation date; therefore the wording of each repeating representation should be checked; and
• other conditions to drawdown. These could include clean down of revolving credit facilities where, for a certain period, all amounts borrowed need to be repaid on a set date or when drawings hit a specified amount.

The practicalities also need to be considered. Who will sign the utilisation request? This will need to be an authorised signatory of the borrower, but with the current social distancing requirements and inability to travel between governorates currently in Oman, this may take longer to organise, so parties may need to consider signing electronically or digitally.

Existing loan agreements

Even those borrowers, who are not seeking to drawdown additional funds, still need to check the terms of their loan agreements. The following provisions should be checked, but there may also be other relevant provisions as every loan agreement is individually negotiated and agreed:

• Repeating representations are also typically made on the first day of an interest period. Repeating representations may include:
  • "no Event of Default is continuing and no other event/circumstance is outstanding which constitutes a default under any other binding agreement which might have a Material Adverse Effect”. The definition of “Material Adverse Effect” is usually heavily negotiated and varies between loan agreements. In these circumstances, the concern is likely to be the reference to the “business, operations, property or condition (financial or otherwise) or prospects of [the Borrower] / [the Group taken as a whole]” or similar wording and whether such wording is a subjective test (i.e. in the reasonable opinion of the majority lenders) or an objective test. However, lenders are very reluctant to rely on such clauses as there is often no clear cut answer, and instead prefer to rely on, for example, a payment default;
  • “There has been no material adverse change in its assets, business or financial condition since the date of the most recent set of financial statements delivered by the Borrower ….”. Again, the term “material adverse change” will be defined in some loan agreement and any such definition will need to be considered. Again, lenders tend to be very reluctant to rely on such clauses;
  • “The Borrower shall procure that no substantial change is made to the general nature of the business of the Borrower…” Therefore, if a factory converts its resources to making a new product such as personal protection equipment, or a hotel becomes a quarantine centre, the borrower will need to discuss it and get the approval of the lenders first; and
  • Financial covenants (if included) are often calculated semi-annually, but may be calculated annually only. If there is a breach of a financial covenant, there may be relief options such as equity cures, prepayment of part of the loan and/or the granting of additional security.
  • EBITDA (earnings before interest, tax, depreciation and amortisation) is an important measure for financial covenants as it is a measure of a company’s performance. Therefore, it is crucial for a borrower to get advice on how to treat losses and when to post them.
  • Please note that financial covenants are backwards looking, therefore any current financial covenants tests will hopefully be met if tested in the near future but going forward, it is likely the situation may be different on the next testing date.
• Information undertakings are effective each and every day of the loan agreement. “The borrower has the obligation to notify the lenders of any event of default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence.” In addition, the lenders have the right to request a certificate from the borrower certifying that no event of default is continuing or giving details of any event of default;
• Positive covenants are also given every day of the loan agreement. The positive covenant that “No substantial change is made to the general nature of the business of the Borrower” will need to be considered;
• Each of the circumstances listed as an event of default also need to be checked and whether this only covers events of default which are continuing. Events of default which may be relevant include:
  • non-payment – please also see Section C below;
  • non-compliance with financial covenants – again see Section C below;
  • non-compliance with information and general undertakings (such as failure to provide a copy of audited financial statements when required) - again see Section C below;
  • insolvency – any insolvency has to go through the Omani courts or the Ministry of Commerce and Industry for a voluntary liquidation, but as the courts are currently shut, there is limited ability for any insolvency proceedings to be started by a creditor and there are likely to be delays in the Ministry of Commerce and Industry in relation to a voluntary liquidation due to the current situation;
  • cessation of business – this might occur when a business has ceased operating due to the current shut down in Oman;
  • material adverse change – the concept of “material adverse change” has no agreed meaning in Omani law unless it is defined within the loan agreement itself. Under English law, it has been given a long-term (as opposed to a short-term) meaning but with the current uncertainty about the length of time of business disruption due to COVID-19, it is hard to gauge whether it may have been breached. However, lenders are very reluctant to rely on such clauses as explained earlier;
  • cross-default – there is whether the borrower has defaulted on another loan or similar arrangements and this trigger a default under this loan agreement. Some cross-default clauses also catch where another lender has the right to call a default under another loan but doesn’t do so (cross-acceleration) but again the specific wording will need to be checked; and
  • audit qualification – in the current times, the auditor may need to include a “material uncertainty in related to going concern” section in the auditor’s report which is part of the annual audited financial statements. A material uncertainty is one relating to events or conditions that may cast significant doubt on the company's ability to continue as a going concern and that may, therefore, indicate that it may be unable to realise its assets and discharge its liabilities in the normal course of business.

In addition there may be other clauses which need to be considered such as:

• amendments and waivers clause including the lenders’ voting thresholds for agreeing to amendments and waivers. Lenders will also need to consider the implications of failure to respond in the required timeframe clauses; and
• notice provisions as it may take longer for notices to be served in hard copy. The use of email would be of great assistance for serving notices, if permitted by the loan agreement. Any conditions relating to use of email need to be strictly abided by (for example, the requirement to email two emails addresses or follow-up with a hardcopy).

The logistics of getting originals signed will also need to be considered (e.g. utilisation request, amendment/waiver requests, compliance certificate) and time frames due to many people working remotely and the inability to travel between governorates currently in Oman. This may encourage a move to signing documents electronically or digitally.

Finally, from a lenders’ perspective, when an event of default is continuing, the lenders will often have the right to assign or transfer its interest in the loan agreement to another lender without the consent of the borrower. However, we don’t anticipate many such assignments or transfers occurring in the current economic difficulties as the secondary market is relatively small here for loans governed by Omani law.

Audited Financial Accounts

Most companies in Oman have a year end of 31 December. Joint stock companies are required under the Commercial Companies Law (CCL) to hold their annual general meetings within 90 days of the year end, however limited liability companies have 180 days. However, the Central Bank of Oman issued a circular in 2002 requiring banks to suspend all facilities of a borrower if the bank has not received the annual audited financial statements within four months of the year end for that borrower.

The Capital Market Authority circular no. 7/2020 extends the period for holding an annual general meeting to approve the annual audited financial statements up to the end of June 2020 (a three month extension) for public joint stock companies. The Ministry of Commerce and Industry provided a similar extension for closed joint stock companies by a notice dated 17 March 2020.

But how does this then fit with the contractual position in the loan agreement and the testing of financial covenants? We recommend that any borrower who has postponed its annual general meeting notifies the lenders accordingly, and agrees a similar extension to any financial covenants testing, information covenants and compliance certificate to avoid inadvertently being in breach of the loan agreement due to the audited annual financial statements not having been approved by the shareholders. Alternatively, the borrower and lenders could agree that the audited annual financial statement are used, even though they have not been approved by the shareholders. Please note that the auditors are usually required to countersign the annual compliance certificate which is issued based on the annual audited financial statements.

Deferment of Loan Instalments/Interest/Profit

The Central Bank of Oman stated in its circular dated 18 March 2020 which is addressed to all licensed banks operating in Oman, that it has decided to take a number of measures from the issuing date of the circular, including, “to accept requests for deferment of loan instalments/interest/profit for affected borrowers particularly SMEs with immediate effect for the coming 6 months without adversely impacting the risk classification of such loans”. This circular gives any affected borrowers (particularly SMEs) the right to request a deferment of loan instalments/interest/profit for six months. Again, however, this needs to be considered in light of the contractual terms agreed between the borrower and the lenders in the loan agreement.

We recommend that any borrower who has been affected by the prevailing economic conditions and wishes to defer its loan instalments/interest /profit due notifies its lenders accordingly. The parties need to agree how the defer loan instalments/interest /profit will be repaid. Will the term be increased by six months? Will it be paid on the last day of the existing term (i.e. as a balloon repayment)? Will it be divided between all the remaining instalments? Or will it be repayable on the next instalment date following the deferment? All the parties need to be clear how it will be dealt with and the loan agreement needs to be amended to reflect the agreement. In addition, the rest of the facility agreement needs to be considered. For example, financial covenants may also need to be adjusted to reflect this, otherwise the borrower may end up in breach of the financial covenants even though the payment deferment has been agreed.

Conclusion

The key points for both borrowers and lenders are to ensure they are aware of, and fully understand, the terms of their loan agreement and to keep talking to each other. The more information the lenders have, the easier it is for the lenders to work with the borrower in these difficult times.

The lenders will usually be keen to work with the borrowers to ensure the borrower survives the current economic difficulties as the lenders are more likely to receive a greater portion of the loan back. In addition, any unduly harsh action by lenders in the current situation is likely to damage their reputation in the market.

If you have any questions or concerns regarding a loan agreement, please get in touch with us.