September 23, 2020

Volume X, Number 267

September 23, 2020

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September 22, 2020

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September 21, 2020

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Dealing with the Financial Impact of the Coronavirus

With the continuing spread of the Coronavirus Disease 2019 (“COVID-19” or “coronavirus”), hospitality service providers are facing a number of issues that have already exacted a heavy financial toll. With consumers staying home and employers limiting travel, there is currently significant pressure on revenues and operating margins. Regardless of the ultimate health impact of this crisis, there is already a significant economic crisis and it may get worse before it gets better.

Financial Covenant Defaults

Loan documents typically contain various financial covenants – including minimum EBITDA, Net Income and Fixed Charge Coverage – all of which are likely to be impacted.  The impacts of an “Event of Default” can have significant impacts on your business.  Determining the best path forward can be difficult and the consequence of a misstep can be severe.

Equity Cure Rights

Some loan documents allow companies to “cure” financial covenant breaches by obtaining additional equity.  Even if such a provision is not in your loan documents, call your lender to discuss this option, preferable before a default occurs.

Reporting Obligations

Reporting obligations commonly include matters relating to litigation, material contracts or events that have a material impact on the business – all of which may arise as a result of COVID-19.

Business Interruption Insurance

Businesses should have a plan in place in the event of a shutdown.  Consider whether there is business interruption insurance in place that will cover the losses incurred.  Also, to the extent that business interruption insurance coverage is available, check your loan covenants to determine whether the proceeds of that policy can be added back to EBITDA or Net Income in calculating financial covenants.

What Should You Do?

Review your loan documents and determine whether or not a default has occurred or is likely to occur.

Be proactive not reactive.  Get in front of the problem.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 67

TRENDING LEGAL ANALYSIS


About this Author

Ori Katz Bankruptcy Attorney Sheppard Mullin Law Firm San Francisco
Partner

Ori Katz is a partner and Practice Group Leader of the Finance and Bankruptcy Practice Group in the firm's San Francisco office.

Areas of Practice

Ori specializes in business bankruptcies and other aspects of insolvency law. He has represented debtors, individual creditors, creditors' committees, parties purchasing assets out of bankruptcy and parties involved in bankruptcy litigation. He has successfully reorganized companies in a wide range of industries, including real estate, retail, construction,...

415.774.3238
Kyle J. Mathews Finance & Bankruptcy Attorney Sheppard Mullin Law Firm Los Angeles
Partner

Kyle Mathews is a partner in the Finance and Bankruptcy Practice Group in the firm's Los Angeles office.

Areas of Practice

Kyle specializes in the following areas:

  • Asset Based Lending

  • Defaulted Loan Workouts

  • Secured Creditor Remedies Enforcement (e.g. Article 9 public and private sales and receiverships)

  • Bankruptcy

213.617.4236
Alan H. Martin Finance & Bankruptcy Attorney Sheppard Mullin Law Firm Orange County
Partner

Alan Martin is a partner in the Finance and Bankruptcy Practice Group and specializes in commercial finance law, corporate restructuring, asset acquisition and disposition, bankruptcy, workouts, enforcement of creditors rights and remedies, and related commercial litigation.

Areas of Practice

Alan's expertise includes extensive work in bankruptcy and state courts, as well as structured finance documentation in domestic and international matters. He also represents special servicers, creditors committees...

714.424.2831