Is COVID-19 a material adverse change or material adverse effect?

The global economy faces a period of significant uncertainty. Governments around the world have intensified restrictions on both business and consumers to halt the spread of COVID-19. This has led to deteriorating economic conditions and changes in consumer behaviour, which may adversely impact the capacity of borrowers to comply with their obligations under their existing facility agreements.

What is a “MAC/MAE”?

Material Adverse Change (MAC) or Material Adverse Effect (MAE) are contractual provisions designed to protect financiers from unforeseen changes to a borrower’s financial situation and also unexpected market fluctuations. They are customarily included in financial contracts such as loans, leases and other financing arrangements.

MAE definitions and their application are usually negotiated on a transaction by transaction basis and, as such, their interpretation can vary. The definition of MAE in the Asia Pacific Loan Markets Association facility agreement includes suggested optionality and can extend beyond the ability of an obligor group to comply with its obligations under its finance documents to an event or circumstances which has a material effect on:

  • the business, operations, property, condition (financial or otherwise) or prospects of the counterparty corporate group taken as a whole; or

  • the ability of an obligor or obligor group to perform its obligations under the finance documents; or

  • the validity or enforceability of, or the rights or remedies of a finance party under, the finance documents including security documents.

The question of whether a MAE has been triggered by an event, series of events or circumstances will generally hinge on the drafting of the clause and how this applies to the facts on a case by case basis.

MAE/MAC provisions are typically relevant in facility agreements in two principal ways:

  • as a stand-alone event of default; and

  • as a qualification or materiality threshold before certain other events (representations or positive undertakings) constitute events of default.

Inevitably, some financiers will have a higher exposure to industries affected by COVID-19 than others (including hospitality, retain and travel). Financiers may consider invoking MAC/MAE clauses to demand early repayment of its loans or, at the least, to stop further monies being advanced. Alternatively, these clauses may act as a lever to renegotiate the terms of the financing arrangements (including as to pricing or general structuring) between the financier and borrower to address concerns around a borrower’s ability to weather the economic impact of COVID-19 and, in particular, service their loans and other financial obligations.

How do they work?

Event of Default

Facility agreements almost always include the occurrence of MAE as a standalone event of default. In other words, a financier may be entitled to declare an event of default if they consider that a MAE has occurred. The decision as to whether or not a MAE has occurred may often be made by a financier alone rather than needing the occurrence to be objectively determined.

Condition precedent

A MAC may be invoked by a financier as the basis to ‘draw stop’ initial or further funding as it can act as a condition precedent to funds being dispersed. For example, a facility agreement may expressly state that a financier has no obligation to lend if a borrower suffers a ‘material adverse effect’ in respect of the borrower’s business, operations, property, condition (financial or otherwise), prospects or its ability to perform certain of its obligations under the agreement or that a financier has no obligation to fund if a potential event of default or event of default is continuing.

Loans made to businesses based on projected cashflows are particularly vulnerable to adverse economic shocks. A financier may have inbuilt commercial triggers or ‘flags’ based on the financier’s risk appetite. For example, the MAE/MAC provisions may be linked to certain financial covenants used by financiers as a measure of the performance of a borrower.

One distinction between the current COVID-19 economic climate and other global economic downturns (including the GFC) is that lenders (including credit funds and other alternative lenders) and other players in the market remain active and ready to deploy capital such that there is currently no shortage of liquidity in the market. Whilst financiers may take a view that they are happy to keep funding drawdowns in the current circumstances, this might change suddenly if liquidity begins to tighten.

Representations and Warranties

Financiers typically require a representation and warranty from the borrower that no ‘material adverse effect’ or ‘material adverse change’ has occurred at various stages throughout the life of a loan.

For example, construction and or infrastructure loans generally require multiple drawdowns for various stages of a project and a financier will typically require a borrower to repeat such a representation at predefined phases of the project. Importantly, this could lead to an event of default if a borrower represents to a financier that there has been no MAC/MAE since the date of the latest financial information provided to the financier.

In an M&A context, a MAC clause might permit a buyer to ‘mothball’ or even terminate a transaction if, as a result of an event or series of events, a significant or material deterioration in the financial health of the seller or target has occurred between the signing of the agreement and the closure of the deal. In addition, financiers may include material adverse effect (business or market related) conditionality to their commitments to fund the acquisition. For more information on MAC clauses in the M&A context, please see our earlier article, MAC Clauses in M&A Transactions – Implications of Coronavirus.

Next steps

There is no standard or set definition of 'Material Adverse Effect' or 'Material Adverse Change' in facility agreements. These generally negotiated on a transaction by transaction basis and intentionally left vague and ambiguous and largely come down to contractual interpretation.

Whilst financiers might not typically rely on the stand-alone MAC/MAE trigger to default facilities and accelerate loans, we are experiencing unprecedented market uncertainty and the question that arises is whether the impacts of COVID-19 will warrant financiers taking this step (as was seen during the global financial crisis). If an event of default was called, this could have a far greater effect than the borrower just having to repay the loans on demand as it may trigger cross default provisions in customer or supplier contracts.

Financiers and borrowers should carefully review the MAC/MAE clauses in their financing agreements to determine whether this could lead to a draw stop or an event of default or other undesired consequences and seek appropriate waivers from their financiers.

The Hamilton Locke finance, restructuring and insolvency team have a broad range of top-tier experience acting for a variety of stakeholders in distressed scenarios. For more information on debt trading, distressed investing and finance, or advice on insolvency, distressed debt and restructuring generally please contact Zina Edwards ( and Nick Edwards (

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