Covid-19 coronavirus: Impending changes to credit facilities agreements of Czech borrowers

The purpose of the draft is to mitigate the impact of the measures adopted in combating the coronavirus Covid-19 epidemic (the Covid Loan Act) on payment obligations of borrowers to lenders in the Czech Republic. 

The Covid Loan Act is likely to become law in short order. Most importantly, it imposes a moratorium (in Czech ochranná doba) on certain payments under finance documents assuming that a borrower opts-in for the protection provided by the Covid Loan Act.  

The loans expected to be affected the most are term loans with longer maturity, such as loans in real estate and project finance transactions and loans provided for acquisitions (including participations in companies except if in the form of shares as securities).

In-Scope of the Covid Loan Act 

The Covid Loan Act introduces a significant protection in the form of certain standstill measures to borrowers of credit facilities provided in the Czech Republic irrespective of the governing law of the underlying finance documents.

It applies to credit facilities utilised before 26 March 2020 and, in some cases, also to credit facilities signed (or otherwise agreed) but not utilised before this date, in particular to credit facilities secured by mortgage of real estate or credit facilities for real estate development, including refinancing of such facilities.

Out-of-Scope of the Covid Loan Act

• Loans with payment default which occurred earlier than 30 days before 26 March 2020, i.e. earlier than 25 February 2020
• Loans borrowed by pension companies or other finance institutions defined in Act No. 377/2005, on Financial Conglomerates, as amended
• Loans the purpose of which is acquisition of investment instruments (e.g. bonds, shares, other securities, derivatives and similar products), including margin loans, and loans which are secured by financial collateral arrangements
• Even though it seems obvious that investment instruments are not loans, these products are specifically excluded
• Overdraft and revolving loans as well as other framework finance arrangements which allow for repeated drawdowns
• Invoices where deferred payment is not subject to a fee and the length of deferral complies with usual business practice
• Operational leasing and similar products without a right to acquire the subject of the lease
• Utilities payments
• Bank guarantees and
• Loans with interest rate hedging, though it is not clear whether all utilisations must be hedged (there seems to be a gap in the Act as loans hedged with currency swaps only are not excluded).

New money during the moratorium

Any new loans or refinancing of existing loans agreed during the moratorium are not limited.

How to apply for the moratorium

• The application process is very informal; it is made by a simple notification delivered to a lender whose confirmation is not required for the opt-in to become effective
• Applications may be sent by post, e-mail or by other easily accessible means of distant communication selected by a lender and made available to a borrower and
• Applications have to identify a borrower, contain its declaration that it opts-in for the moratorium due to negative economic consequences of the Covid-19 pandemic and identify the loans concerned (otherwise the opt-in relates to all the loans of that borrower with a particular lender).

Ultimately, delivery of the application results in a unilateral change of a finance document which may not even respect the agreed form of notifications under the finance document.

Effects of the moratorium

• Principal payments deferred but interest continues to be payable either as standard interest or compounded with the unpaid principal
• Other periodical payments continue to be payable (as opposed to one-off fees)
• Agreed fixed interest rate will extend to apply for the length of the moratorium after it expires
• Automatic prolongation of the security period for the length of the moratorium and
• A borrower is obliged not to make disposals, including distributions to its shareholders, of its property if such property could be used for satisfaction of the lenders' claims (unless such disposals do not constitute substantial change in the class, use or determination of such property or unless they are of insignificant amount).

Protection granted – for how long?

The moratorium starts on the first day of the month following the month in which a borrower notifies a lender that it opts-in for the protection under the Covid Loan Act and ends on 31 October 2020 or, if so selected by a borrower, on 31 July 2020.

Event of default and enforcement of security

• If a borrower opts-in for the moratorium, non-payment of the principal during this time can neither establish an event of default nor entitle a lender to enforce the security and
• If a corporate borrower does not opt-in for the moratorium, the Act does not limit lender's rights under the finance documents.

However, as a corporate borrower that has opted-in for the moratorium is still obliged to pay interest and other periodical payments, failure to pay interest may still result in the borrower's default and, ultimately, give the lenders a right to enforce security.

Is it possible to contractually exclude the measures adopted by the Covid Loan Act?

In our view yes, this should be possible.

Who'll bear the costs?

• Application for the moratorium is free of charge for the borrowers. Any fee arrangements agreed in e.g. amendment to the affected credit facilities agreement and related to the moratorium will not apply as the Covid Loan Act will override a contract.
• This means that the lenders will have to bear all costs of administration of the loans as amended by the exercise of the opt-in mechanism.

What's next?

The Act has been scheduled for the debate in emergency regime in the Parliament of the Czech Republic on 7 April. It can therefore be expected to become law fairly quickly.