The continued uncertainty surrounding U.S. tariffs and Canadian countermeasures has created significant financial pressure for many Canadian businesses. If these measures remain in place, some Canadian businesses may experience declining revenues, increased operating costs, reduced liquidity and disruptions to their supply chains. These financial impacts can have serious consequences for borrowers including temporary breaches of financial covenants, failures to satisfy liquidity tests included in a loan or other credit instrument or lead to concerns about the borrower’s ability to meet future loan payments.
Why borrowers should act early
Lenders generally dislike surprises and are more often willing to work with borrowers who identify the problem early on, provide a credible explanation and propose a solution before the breach occurs. Early engagement can preserve options and improve the likelihood of reaching a consensual solution with the lender.
Ideally, borrowers should initiate these conversations as soon as financial stress becomes apparent. Early engagement signals good faith and transparency which are crucial to maintaining a productive borrower-lender relationship. This resulting goodwill can translate into more favourable treatment towards the borrower and also provides the borrower stronger negotiating power than after a breach occurs.
Recommended measures for borrowers
A variety of tools may be available to stabilize the borrower-lender relationship and address a potential default. A non-exhaustive list of options includes:
- obtaining a waiver of an existing or anticipated default;
- negotiating amendments to the loan agreement or financial covenants;
- implementing an equity cure;
- providing additional security;
- entering into a standstill agreement;
- negotiating a forbearance agreement;
- refinancing all or a portion of the indebtedness;
- restructuring payment obligations or repayment schedules; and
- pursuing other restructuring solutions tailored to the borrower’s circumstances.
We’re here to help
We can assist borrowers in reviewing their obligations under their loan, credit and related financing documents and work alongside their financial advisors to identify potential defaults before they occur. This includes assessing the nature and cause of any anticipated breach, determining whether the issue is temporary, evaluating the borrower’s available options, and developing a strategy to present to the lender with the objective of returning the borrower to compliance.
If your organization would like assistance, please reach out to a member of the MLT Aikins Competition/Antitrust Investment and Trade or Insolvency and Restructuring teams.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.
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