DWF logo

Search

DWF logo

            Advice for issuers and sponsors of debt capital products

            In response to the threat of Covid-19 and its potential disruption to financial markets, this article considers what actions issuers and sponsors of debt capital products should take.
             

            Date: 17/03/2020

            Most businesses will have to make short-term alterations, with the likely result being a temporary tougher trading environment; either through the practical implications of governmental interventions (curfews, forced closures, interventions in the market etc.) or through a temporary reduction in consumer demand. 

            In response to the threat of Covid-19 and its potential disruption to the market, Issuers and sponsors of debt capital products should:

            • assess and discuss with the appropriate transaction stakeholders the likely impact of the Covid-19 pandemic on their ability to deliver or perform their obligations and seek to agree pragmatic solutions to this temporary issue; 
            • check and discuss with their advisers any force majeure provisions of key transaction documentation or, in the worst case scenario, the applicability of the common law principle of frustration; and
            • where appropriate, check any business interruption insurance to assess any income protections available (in respect of a trading business) or any general credit risk insurance in each case for losses suffered or to be suffered as a result of the response to Covid-19. 

            Investors in bonds and other debt capital products will likely be temporarily more cautious or even unwilling to invest until the market is more stable or has been given an opportunity to react to further governmental action, notwithstanding the curfews and travel restrictions in place in much of continental Europe and the recent emergency cuts to interest rates by both the Bank of England, the Federal Reserve, and the expected cut in interest rates by the European Central Bank. 

            Force Majeure and Frustration

            Governmental action in response to the Covid-19 pandemic is likely to cause significant short-term difficulty for most businesses and may temporarily make the performance of certain contractual obligations difficult, if not impossible. Performance of contractual obligations could be affected by physical restrictions put in place by governments (such as travel bans and curfews) or the resulting reduction in economic activity, making businesses less profitable and therefore the servicing of debt more difficult. 

            To address scenarios where unexpected events have a material impact on a contractual parties' ability to meet its obligations there under, many contracts contain what is termed a "force majeure" clause. Force majeure clauses limit the liability of the parties to a contract where the performance of the obligations documented in that contract are affected by events outside the control of the parties (such as natural disasters, governmental interaction etc.). 

            English courts typically interpret force majeure clauses on their strict drafting and are unlikely to impute events in to a force majeure clause where no specific reference to that event is included. For this reason, force majeure clauses are typically drafted in such a way as to capture as many events as possible (for example "…any governmental actions…" or "…any other event or circumstance likely to have an impact…"). Issuers and sponsors should discuss with their professional advisers the coverage of their specific force majeure clauses to assess whether any relief is available.

            Force majeure clauses often provide for specified reliefs in respect of specific obligations and often for a limited time or other obligations attached. Those further obligations typically include the requirement to take certain mitigating steps or to notify other parties of certain further events. Discussing any force majeure clause with professional advisers should ensure that the relief available pursuant to a force majeure clause is not invalidated. 

            In circumstances where the event in question makes the performance of certain contractual obligations impossible, the common law principle of frustration may apply and thereby reduce, delay or, in limited circumstances, remove the obligation or obligations which are no longer able to be performed. 

            Frustration provides that, where a serious event occurs (after the formation of a contract) which is both unexpected and beyond the control of the parties, and which renders it physically or commercially impossible to fulfil the contract (or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract). 

            Frustration is applied in limited circumstances only and, with the expected time-limited impact of Covid-19, it is unlikely to be applicable in many circumstances. 

            If you need any further advice in this area do not hesitate to contact one of our experts.

            Related people

            Martin Pugsley

            • Partner // Head of Financial Services Sector

            We use cookies to give you the best user experience on our website. Please let us know if you accept our use of cookies.

            Learn More

            Your Privacy

            When you visit any web site, it may store or retrieve information on your browser, mostly in the form of cookies. We mainly use this information to ensure the site works as you expect it to, and to learn how we can improve the experience in the future. The information does not usually directly identify you, but it can give you a more personalised web experience.
            Because we respect your right to privacy, you can choose not to allow some types of cookies. Click on the different category headings to find out more and change permissions. However, blocking some types of cookies may prevent certain site functionality from working as expected

            Functional cookies

            (Required)

            These cookies let you use the website and are required for the website to function as expected.

            These cookies are required

            Tracking cookies

            Anonymous cookies that help us understand the performance of our website and how we can improve the website experience for our users. Some of these may be set by third parties we trust, such as Google Analytics.

            They may also be used to personalise your experience on our website by remembering your preferences and settings.

            Marketing cookies

            These cookies are used to improve and personalise your experience with our brands. We may use these cookies to show adverts for our products, or measure the performance of our adverts.