Please find below a brief note on how the spread of Covid-19 may impact clauses relating to material adverse effect ("MAE"), material adverse change ("MAC") and force majeure ("Force Majeure") under Swedish law credit agreements.
MAE terms are generally included in Swedish LMA based credit agreements. The MAE definition can include material adverse effects on the business, operations, prospects and assets or financial conditions of the borrower, or the borrower group, and the ability of the borrower, or the borrower group, to comply with its obligations under the finance documents, or at least the payment obligations thereunder. The term MAE is then used throughout the agreements as a qualifier to limit certain representations and undertakings. No MAE may also be a requirement for other future transactions (such as acquisitions or disposals) and the occurrence of MAE may function as a draw stop under a credit agreement.
Since the term MAE is only used in relation to the operations and obligations of the borrower under credit agreements, it is likely that it is the lender who wishes to claim that an MAE is at hand. In such cases, the lender has the burden of proof regarding the occurrence of the MAE. The LMA template provides for two alternatives to define MAE; either by reference to a subjective test (i.e. in the reasonable opinion of the lender), or by a reference to an objective test (i.e. without reference to lender's opinion), wherein the requirements for demonstration of MAE would most likely be set lower in case of a subjective test.
In our experience, MAE is seldom used as a ground for action by the lenders. Nonetheless, it is negotiated by the parties in almost every transaction, which means there is a broad variety of MAE definitions and carve-outs on the Swedish market. For a lender to rely on MAE as a basis for any acceleration, termination or enforcement under a credit agreement, a certain level of certainty need to be at hand. Due to the uncertainties regarding the effects of the Covid-19 pandemic on the market and the individual businesses, it is difficult to assess to what extent an MAE has occurred. According to most experts as of today, the pandemic will be temporary. However, based on the informationregarding the spread of Covid-19 available as of today, 20 March 2020, adverse effects on certain businesses and operations are evident. Since the burden of proof lies with the lender, it is likely that the MAE mechanics may serve as a re-negotiation tool rather than a basis for acceleration or termination in most cases.
The MAC clause is an event of default clause, which either relates to any material adverse change in the assets, business or financial conditions of the relevant borrower, or borrower group, or any event or circumstance with may have an MAE (as the term is defined in the relevant credit agreement). It is the lender claiming that an event of default has occurred that must prove this, and the MAC clause may include an objective test or a subjective test. Hence, the clause is normally very broad and lacks details as to what events or circumstance shall have occurred or be fulfilled for the clause to apply. Accordingly, the clause is seldom used to accelerate a loan.
The question then is if the pandemic spread of Covid-19 triggers a MAC. For a lender to show this, it must have a clear and rather objective analysis at hand, showing that non-performance of essential obligations under the finance documents are to be expected. One challenge in relation to Covid-19 is to analyse the time period of its adverse effects on the relevant business or operations. The effects should probably not only be temporary, to the extent lengthy adverse effects on the business of the relevant company are not evident. Other events, such as rescue packages from the government, can also limit the negative effects of Covid-19, with the effect that a MAC has not occurred. As of date, that sort of clear cut and objective analysis seems difficult to achieve, given the uncertainties and lack of knowledge around Covid-19 and its effects on the society worldwide.
Force Majeure clauses as well as MAE are one-sided in most Swedish credit agreements, making it clear that the lender shall not be held responsible for damages due to certain events defined therein, and which are normally being out of the control of the parties. What is included is a matter of contract, but normally damage arising out of any Swedish or foreign legal enactment, or any measure undertaken by a Swedish or foreign public authority, or war, strike, lockout, boycott, blockade or any other similar circumstance, are included. It is again worth noting that this clause normally works in favour of the lender, and that a borrower would not be able to refer to this clause as a basis for any requirement or request relating to, for example, a pandemic.
The fact that the clause is one-sided, does not however rule out that a borrower may refer to force majeure as ground for non-performance of some part of the agreement, on the basis of general Swedish law. More information relating to force majeure under Swedish law generally can be found on our website here.
The Force Majeure clauses included in Swedish credit agreements are usually not negotiated between the parties. Since the Swedish standard clause does not refer to pandemics or other similar events or worldwide lock downs, it is uncertain whether Covid-19 would be covered by that clause. In our experience, lenders tend to be cautious about invoking terms which are not clear cut in relation to the relevant event of invocation, why Force Majeure clauses might not be the way forward for a lender wanting to approach a borrower in relation to Covid-19. If Covid-19 would cause the payment system to fail or the credit market to come to a complete halt, it could perhaps be possible for a lender to invoke the Force Majeure clause. This would, however, require a careful analysis and prediction of the effects of the pandemic.
The LMA based credit agreements generally include a broad range of default grounds, which, in light of the pandemic, could be expected to occur over time, at least in certain businesses. Such defaults include non-payment, breach of financial covenants and cross defaults. We might also see insolvency and cessation of business defaults coming into play. If a lender prior to that would like to invoke a MAC event of default, that may be a way forward. Not least for the purpose of renegotiating terms or avoiding drawdown under credit facilities prior to other hard defaults occurring.
From the borrower's perspective, it is unlikely that there is room, under the Force Majeure clauses regularly used in Swedish loan transactions, to avoid payment or other obligations under the finance documents, and the MAE and MAC clauses only refer to the obligations of the borrower or the borrower group.
This note provides information of a general nature. It does not purport and should not be considered to be a guide to, or explanation of, all relevant issues or considerations that may arise in connection with a particular transaction or contractual relationship. Advokatfirman Cederquist KB assumes no liability for any use to which this note may be put.