Over the past few months, the COVID-19 pandemic has severely affected the world economy. During the financial downturn, companies in the Netherlands have been busy ensuring adequate levels of liquidity and cash flow through a variety of sources. Where some companies opted for government support schemes – in particular the Dutch business finance guarantee scheme known as "GO-C"– others were able to use their revolving lines of credit or to turn to the debt capital markets. In this article, we reflect on these alternatives and provide practical insight based on our experience.

Drawdowns

After brewer AB Inbev drew USD 9 billion under their RCF at the beginning of the COVID-19 pandemic, many companies followed suit. Even those with apparently sufficient liquidity drew on the full amounts available under their credit lines, to ensure adequate levels of available cash in anticipation of a deepening global recession. The main reason for this precaution was that companies were afraid they would not have access to cash when needed because of:

• potential future draw-stops as a result of financial covenant breaches or other defaults (for example, cessation of business); and
• potential inability of lenders to fund as a result of the economic downturn.

Although not all companies immediately needed the cash drawn, lenders have cooperated with most requests. An occasional caveat, however, has been that lenders asked the borrower to keep a pro rata part of the funding in a bank account held with the relevant lender. The trend of emergency drawdowns has diminished rather quickly for two reasons: the constructive attitude that most lenders have shown towards borrowers in negotiations about waivers or amendments of constructive financial covenants and other undertakings, and the extensive government liquidity support schemes that have been introduced. Despite the cooperative spirit, companies should keep assessing their short-term liquidity positions and their compliance with any – revised – covenants, in addition to continuing the constructive dialogue with their lenders.

Amended financial covenants

As a result of the pandemic, many companies are faced with a significant decline in their EBITDA. Since most facility agreements include financial covenants calculated on the basis of EBITDA, these companies have had to negotiate with their lenders to resolve this issue. This has been dealt with in a number of ways, including:

• waiving breaches of the relevant financial covenants for a certain period;
• resetting the relevant financial covenants permanently or for a certain period;
• adjusting the definition of EBITDA in ways that prevent financial covenants from being breached (for example, using historic figures or the newly invented EBITDAC - earnings before interest, tax, depreciation, amortization and COVID-19);
• replacing covenants, mostly by minimum EBITDA or minimum liquidity covenants; or
• a combination of any of these options.

These amendments made to covenants are generally paired with additional reporting and information requirements.

GO-C in practice

In addition to making use of existing facilities, many companies have been looking for additional funding alternatives. The Dutch government introduced the GO-C scheme which enables lenders to obtain a state guarantee of 90% on medium-sized loans, and 80% on large loans provided to Dutch companies. After its introduction, the GO-C scheme was swiftly perceived to be a reasonable and accessible solution for companies facing difficulties as a result of the pandemic. The Dutch government has not yet published figures on the number of applications, successful or unsuccessful, for the GO-C scheme. In practice, we have seen companies face various issues when obtaining GO-C guarantees, such as: Strict interpretation The GO-C scheme contains a number of eligibility criteria and practice has shown that the Netherlands Enterprise Agency (RVO) is strict in applying those criteria. We have so far noted a relatively high focus on whether or not a company: (i) has a substantial part of its business in the Netherlands, where the rule of thumb is set at 50% of company turnover, (ii) is sufficiently profitable, and (iii) has reasonable continuity prospects, with attention paid to a company's debt ratios. No direct involvement The lenders have to make the actual application to obtain the GO-C guarantee and they also entertain the related discussions with the RVO. As such, companies are in general not directly involved in any of those discussions and may lose control over the process itself. Shareholder support required In several instances, RVO required shareholders to support the requesting company by providing equity or other funding first, with the GO-C serving as backstop to bridge the gap. In situations where shareholders were not willing or able to meet this requirement, GO-C applications were typically rejected. No imminent liquidity need Companies that applied for the GO-C to cover for potential future liquidity requirements were also turned down. To avoid spending time and resources on negotiating and documenting the specifics of the required loans, companies should assess the likelihood of obtaining the state guarantee upfront. Companies that are considering applying for the GO-C scheme are advised to:

• discuss the potential application with their legal counsel and – importantly – with their lenders before starting the process, so that any expectations can be managed and insights can be shared. In some cases, it will be clear in advance to their legal counsel or lenders that an application is likely to be unsuccessful;
• ask their lenders to entertain preliminary discussions with the RVO, possible joined by the company itself. The RVO may be able to provide its preliminary views on the likeliness of receiving a state guarantee under this scheme; and
• keep in mind that the deadline to apply for the GO-C scheme is 15 December 2020.

Debt capital markets

The debt capital markets provide another alternative for attracting additional funding, especially since bonds are generally covenant-lite. Whereas the pandemic immediately closed the debt capital markets for several weeks, we have recently seem a substantial increase in the amount of new DCM transactions. Activity on the secondary markets has also increased. When turning to the market, companies need to carefully update their disclosure language to incorporate the impact of Covid-19 on their business. We see this being included in more generic as well as company-specific risk factors, and we have also seen companies updating their existing risk factors by Covid-19 disclosures, where relevant. Since investors are expected to pay specific attention to the impact of Covid-19 on the business, companies often include a summary of the related updates in the "recent developments" section as well. Recently, a Covid-19 related optional redemption clause was introduced in various US law bonds issues). The "COVID claw" is an optional redemption clause that allows the issuer to buy back a certain amount of the issued bonds – usually around 35-40% – at a certain premium, if the issuer is able to obtain a debt facility under any government support scheme shortly after issuing the bonds, generally within 120 days. This might provide flexibility for companies in funding their immediate liquidity needs through the debt capital markets while in the process of assessing their eligibility for government support schemes.

Going forward

As the financial markets emerge from the first wave of the pandemic, we have seen many waiver and amendment requests being successfully finalised and all types of financing transactions picking up again. However, the current optimism in the capital markets may fade if government stimulus packages stop at some point or if the pandemic enters into a second wave – and the terms of the many (mostly short-term) waivers expire at the same time. Adaptability is key in these difficult times. In order to navigate the recession as smoothly as possible, companies need to enter into dialogues with their lenders and be as resourceful as they can be – especially since most financing sources appear to be available again – not only in relation to the short term, but with a view on the longer term as well. Companies will need to remain vigilant and continuously assess their liquidity positions, and they should keep an eye out for additional government initiatives and market opportunities to change their financing structure once things have settled down.