1. What are the MAC / MAE provisions in the event of a fault?

A MAC (Material Adverse Change) or MAE (Material Adverse Effect) default clause (MAC and MAE are generally interchangeable terms) in loan contracts (“MAC Provision”) allows lenders to invoke certain contractual rights aimed primarily at: (i) suspend the lines of credit still available; and (ii) decree ̶ by withdrawing the agreement ̶ the end of its legal effects with the consequent “acceleration” of the borrower’s payment obligations.

The MAC provisions can be triggered upon the occurrence of events / circumstances which, among other things, (significantly) affect the legal, economic, financial, patrimonial or commercial situation (“commercial MAC”) of the borrower (or of some of them) and / or (or due to the aforementioned events / circumstances) its ability to service the debt (“payment MAC”). In addition, if the loan is secured, the MAC provisions may also extend to the validity, legality and enforceability of the security granted to the lenders.

The MAC provisions are intended to protect lenders in the event of the occurrence of certain unforeseen events which, even if they are not caused by the borrower and do not relate to his particular sphere, due to their importance, are likely to have a significant negative impact on the economic, financial and asset situation and on the borrower’s ability to meet his financial obligations to the lender.

MAC provisions generally have broad and generic formulations (for example, “the effect of any event whose consequences, directly or indirectly, may have a material adverse effect on the legal, economic, financial or patrimonial situation of the borrower or on its activities ”). For this reason, it is crucial to understand what the minimum conditions are necessary for lenders to rely especially in a situation of instability such as the current one due to COVID-19 on the MAC provisions contained in loan agreements. .

2. How do the MAC / MAE fault arrangements really work?

Generally speaking, a lender can trigger a MAC disposition if it is able to prove (i) that the relevant event / circumstance was unforeseeable at the time the agreement was made by the parties involved, and (ii) that the effects of the agreement are in themselves likely to negatively affect the financial situation of the borrower, causing, for example, a significant drop in income. Finally, this event / circumstance (iii) generally cannot be of a temporary nature.

Following the occurrence of a material adverse event / circumstance, the lender must assess (using standards of reasonableness and good faith) whether such event / circumstance materially affects the ability of borrowers to repay the loan.

MAC provisions are generally specific to the business / financial situation of the borrower and do not refer (subject to exceptions) to global economic conditions or events that affect the loan market in general (for the latter case, please see paragraph 4 below regarding MAC Provisions contained in the Terms of Reference and Letters of Commitment).

3. Can lenders rely on the MAC / MAE provisions in the event of default following the outbreak of the COVID-19 virus?

Lawyers will need to assess in each case whether the MAC provisions contained in the loan agreements are an appropriate remedy for lenders in the wake of the COVID-19 virus outbreak and emergency measures decreed by global governments. Can we define the effects of such an event as “substantially adverse” to, among other things, the ability of the individual borrower to meet its payment obligations to the lender?

Of course, this question cannot be answered unambiguously, and above all, a simple “yes” or “no” is not enough. Also, the answer will depend on many factors, including the literal wording of the unique MAC layout.

At present, we can say that the scope of MAC provisions and the possibility for lenders to take advantage of them will depend very much on the overall duration of the phenomenon examined and the restrictive measures set by individual governments. lasts, the more profound the effects on the real economy and the economic and financial situation of borrowers.

Another essential element for the assessment is the sector in which the sole proprietorship operates. For example, regarding the COVID-19 emergency, we already know that some sectors will be more affected than others (eg aviation, tourism, automotive) and, therefore, it is certainly more likely that the COVID-19 effects (a prerequisite for the application of the MAC provisions) will appear earlier in these sectors than in others.

The MAC provisions all have in common that the effects of the events referred to (directly or indirectly) in these provisions must have lasting consequences and that the lender must be able to prove, in the most appropriate courts, that the event in question has already had (and will continue to have) tangible effects on the economic results of the funded company.

In addition, in Italy, MAC Provisions has not found any particular legal confirmation, and according to our experience, in the past (even in comparable crisis situations ̶ but not equivalent, given its uniqueness ̶ to the current), lenders have always been very reluctant to invoke their request.

In conclusion, we believe that a precise and well-founded analysis of the hypotheses of application of the MAC provisions with regard to the spread of the COVID-19 virus is extremely complex – at least in this initial phase since COVID-19 the effects on the real economy are still uncertain and will depend a lot on the duration of the phenomenon.

4. MAC / MAE provisions in the commitment documents

Mandate and commitment letters are agreements signed by lenders aimed at guaranteeing the future borrower the financial support necessary for the completion of a transaction (generally a business acquisition) pending negotiations with the counterparty or in the phase between signing and closing of the transaction.

These types of letters, quite common in LBO transactions, often contain termination conditions linked to the occurrence of a MAC / MAE. These conditions precedent allow the subscribers of the commitment to revoke (and therefore to withdraw) from the commitment to guarantee and disburse the loan or to renegotiate certain economic conditions of the loan (for example requesting an increase in the margin due to increase in associated risk). Some of these provisions (which, as mentioned above, take the form of termination conditions) also include a “market” MAC / MAE, that is to say they include among the events the consequences of which, direct or indirect, can negatively affect the ability of the future borrower to fulfill its contractual obligations also events concerning “the performance of the Italian or international financial markets”. In recent years, these provisions have been increasingly infrequently included in mandate and commitment letters (borrowers benefited from stable financial markets, including low interest rates linked to expansionary central bank policies and the particularly short duration of commitments and managed contracts). In light of recent events, we expect these provisions to become generalized again, if only after lengthy negotiations, in future mandate and commitment letters.


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