- MAC clauses: Does Covid-19 present a “materially adverse change”?
MAC clauses: Does Covid-19 present a “materially adverse change”?
MAC clauses: Does Covid-19 present a “materially adverse change”?15th April 2020 - Published by Kuits banking and real estate finance team
MAC clauses: a brief overview
A material adverse change (MAC) clause is a sweeper provision intended to protect a lender against unforeseen events which have been, or may be, detrimental to the borrower’s business. Typically, MAC clauses are incorporated within debt finance agreements, for example facility or loan agreements. A materially adverse change clause gives a lender a contractual right to accelerate the loan.
It is difficult to confirm whether a specific event has fallen within the scope of a MAC clause. It is a matter of interpretation. The High Court, in the case of Grupo Hotelero Urvasco SA v. Carey Value Added  EWHC 1039 (Comm), outlined the main factors to be considered when interpreting MAC clauses:
- A material adverse change in a company’s financial condition will be determined mainly by reference to its financial information covering the relevant period. It would not cover a company’s prospects or more general economic or market changes;
- A change in financial condition is only materially adverse if it significantly affects a company’s ability to perform its obligations under the agreement, and in particular its ability to repay the loan;
- A lender cannot enforce a MAC clause based on circumstances it was aware of when the agreement was entered into;
- The change must not be temporary;
- The burden of proof is on the lender to show the event or circumstance described in the clause has occurred.
If a MAC clause is drafted objectively then the lender must establish that, on an objective basis, the events or circumstances which have arisen fall within the scope of the clause. Alternatively, a MAC clause, may be drafted subjectively, in which case it is normally “in the (reasonable) opinion of the lender” as to whether any such event or circumstance is a materially adverse change. The more subjectively drafted the MAC clause is, the more straightforward it is for a lender to establish that the MAC clause has been triggered.
Is COVID-19 a “materially adverse change”?
When considering the above judicial guidance in Grupo and when objectively drafted, it is unlikely that COVID-19, on its own, is likely to trigger a MAC clause. However, if the clause has been drafted subjectively then the position becomes more unclear. It appears that the longer the pandemic continues, the more likely it is that a MAC clause could be activated by a lender.
Before looking to rely on a MAC clause in respect of COVID-19,a lender should of course consider the reputational and market impact of it taking steps to enforce such a provision. In light of the FCA, FRC and the PRA’s joint statement on 26 March 2020, where banks were called to be “a source of strength for the real economy” during the current, unprecedented and uncertain crimes, it would be prudent for lenders to avoid relying solely on a MAC clause.
If you are a lender and you have any concerns with regards to the impact of COVID-19 on your existing portfolio, or future loans, then please contact our experienced banking and real estate finance team on 0161 838 7809 or online HERE.