Odujinrin & Adefulu

Covid - 19 and its Effect on Financing Transactions in Nigeria: Practical Considerations

“The coronavirus infectious disease (“Covid-19”) was declared a global pandemic by the World Health Organisation on the 11th of March 2020. However, besides the attending public health crisis brought about by the disease, there are major concerns about a looming global economic crisis which may, among other things, affect the abilities of parties to comply with their obligations and undertakings in finance transactions. Accordingly, we have set out some practical considerations that the effect of Covid-19 may raise in financing transactions in Nigeria as well as some practical tips in alleviating the effects of these. click the link below to read our thoughts and recommendations.” The coronavirus infectious disease (“Covid-19”) was declared a global pandemic by the World Health Organisation on the 11th of March 2020. However, besides the attending public health crisis brought about by the disease, there are major concerns about a looming global economic crisis which may, among other things, affect access to finance, the abilities of parties to comply with their obligations and undertakings and the veracity of representations in finance transactions, due to the measures authorities are taking to contain the outbreak. Accordingly, we have set out below some key issues as well as considerations that the effect of Covid-19 may raise in financing transactions in Nigeria as well as some practical tips in alleviating the effects of these.

CONDITION PRECEDENT/SUBSEQUENT

Facility Agreements usually set conditions precedent (“CP”) or conditions subsequent (“CS”) to loan disbursements. We have observed that the lockdown is affecting the ability of borrowers in the Nigerian market to deliver CP and CS documents in original forms including wet ink signature pages of transaction documents. Furthermore, regulatory engagements have also been hampered by the lockdown as it is now increasingly difficult (and indeed impossible in some cases) to make regulatory applications, obtain regulatory approvals, effect corporate filings and conduct due diligence investigations. This may impact on a borrower’s ability to provide relevant CP/CS documents within the stipulated timeline and consequently satisfy the conditions for closing the and/or continuing with facilities.

Recommendations

Borrowers should seek extensions on deliverables: For existing facilities, we will recommend that borrowers should review any such conditions and engage the lenders on extensions of time or where appropriate, a waiver of those conditions.
  • Lenders should consider accepting electronic signatures in lieu of wet ink signatures: Lenders may also consider closing facilities on the basis of electronic signatures appended to documents and circulated via emails. This is given that physical deliveries are practically impossible during the lockdown period. Whilst Nigerian law generally admits electronic signatures in evidence, it is, however, important to note that electronic signatures are not typically acceptable for the purposes of filing and perfection of security documents with regulators such as the Corporate Affairs Commission (“CAC”) and most land registries. In this regard, lenders are advised to consider their risk appetites vis-à-vis the relevant borrower and obtain an undertaking to deliver physical documents promptly once the lockdown is over. For business efficacy, post Covid-19, we will also recommend that Nigerian regulators, such as the CAC and land registries, consider accepting electronic signatures including from recognised e-signature platforms such as Docu-sign, PandaDoc, Zoho sign, SignNow etcetera subject to any guidelines deemed fit by each regulatory authority.
  • Legal opinion and due diligence: Given that due diligence investigations typically conducted at various regulatory authorities are presently impossible in the states under lockdown, this has impacted the ability of lawyers to conduct requisite searches typically required to issue unqualified legal opinions in connection with facilities.
Accordingly, for transactions that must close during this period, lenders and their counsel may avail themselves of publicly available information such as is contained on the website of a regulator. By way of example, the registration number, name, date and address of a company/business or entity registered in Nigeria may be confirmed by conducting a free search on the website of the CAC. Furthermore, said opinions may rely on the borrower’s representations as to status, power, validity, solvency, no event of default etcetera that may be contained in the facility documents (it is important that these representations are contained in facility documents negotiated during this period) Finally, to ensure that constitutional documents provided for lender reliance in connection with facilities are up to date, we will recommend that constitutional documents are certified by the company secretary of the borrower(s)/relevant obligor(s) as up to date. This confirmation may also be required to be made by a borrower’s director in a formal director’s certificate.

COMPANY MEETINGS

We have observed that the lockdown has made it impossible for some companies to hold physical board meetings and/or shareholders meetings resulting in companies’ inability to make necessary strategic decisions including approving facilities.

Recommendations

  • Written Resolutions: we recommend that relevant matters (including any approval of a facility) be approved via a written board resolution signed by all board members per the provisions of the Companies and Allied Matters Act. In the case of a private company, any matter(s) required to be approved by shareholders may likewise be approved via a written resolution signed by all the shareholders of the company. Written resolutions are valid under Nigerian law in the absence of physical meetings.
  • Hold virtual board meetings where absolutely necessary: Alternatively, and in the context of approving loan facilities, borrowers may hold board meetings via telephone conferences/video conferences where necessary. However, this approach may be relied on if the constitutional documents of the companies provide for such virtual meetings.
In addition, the Nigerian Stock Exchange (“NSE”) has lent credence to this approach and has recently released guidelines for conducting virtual board, committee and management meetings. The goal is to ensure that when companies opt for virtual participation in meetings, they are accessible, transparent, efficient, and cost-effectively managed, while complying with statutory and corporate governance requirements. Borrowers who are public companies may consider seeking legal advice on conducting their virtual meetings in line with the NSE guidelines on virtual meetings.

DISCLOSURES

Facility Agreements usually contain undertakings that gives lenders oversight over a borrower’s financial condition. The lockdown may have altered the financial/revenue projections which formed the basis of a facility. This may impact on a borrower’s ability to pay scheduled principal or interest or transaction fees when due. Facility Agreements will typically require that the borrower discloses any issue that may affect its financial condition or may request that this is disclosed upon a lender request.

Recommendations

  • Communicate shortfalls to Lenders: Borrowers should review their financial condition in light of any shortfall in envisaged revenue streams vis-à-vis the requirements in their loan agreements with a view to identifying any disclosure requirements and the applicable timelines. Borrowers are advised to communicate all shortfalls, including potential shortfalls, with the lenders and the appropriate steps taken to address the shortfalls.
  • Lenders should assess borrower’s financial condition: Likewise, lenders concerned about a borrower’s ability to perform its obligations as a result of the pandemic may also reach out to the borrower for information on their financial condition visà-vis the lockdown. This will enable them to assess (as lender) the impact of the pandemic on the borrower’s obligations and the borrower’s recovery plans.

EVENTS OF DEFAULT

A borrower’s failure to comply with obligations under the finance documents may trigger an Event of Default (“EoD”). In this regard, we note that the pandemic will adversely affect the business operations of borrowers that may prevent them from complying with their obligations (such as payment obligations) which may lead to an EoD.

Recommendations

  • Review all Finance Documents for EoDs: Borrowers should review EoDs (including potential EoDs) to ascertain if they are already in breach, if any relevant material adverse change in their businesses qualify as an EoD or if any grace periods are applicable and if any waiver requests should be sent to lenders (for example, deferral of payments due). Borrowers should also liaise with lenders to ascertain if financial covenants need to be adjusted to take market conditions into consideration.
  • Restructuring of Facility: Lenders, likewise, may need to consider if waivers may be availed a borrower or if any restructuring /refinancing facilities may be offered to the borrower that will have a positive impact on the borrower’s facility performance. Lenders should also consider if transaction fees need to be increased to reflect any heightened risk of borrower default.
It is important to note that the issues listed above are non-exhaustive. Given the uncertainty surrounding how long the economic effects of the Covid 19 pandemic will last, we recommend that finance parties and Nigerian obligors review the terms of existing facilities so as to accommodate current and future realities. This article should not be taken as purporting to provide legal advice on any matter. Kindly send an email to enquiries@odujinrinadefulu.com if you need further legal advice in respect of the issues highlighted.