COVID – 19: ASPECTS TO BE TAKEN INTO ACCOUNT BY ISSUERS OF BOND AND OTHER DEBT INSTRUMENTS
In the context of the health crisis caused by the expansion of COVID – 19 and the measures taken by the Peruvian authorities to control it, it is important that issuers of bonds, commercial papers and other debt instruments pay attention to the following aspects in order to prevent possible defaults:
REGARDING ISSUES IN CIRCULATION
Liquidity problems. The effects of the health crisis could lead to temporary liquidity problems that make it difficult for certain issuers to pay interest or pay at the agreed time. In such case, the following measures could be taken: (i) review the act or contract of the Issue to determine if we have any special procedure that must be followed in such circumstances; (ii) evaluate the possibility of accessing alternative sources of funding that require the issuer to have the necessary cash to make the timely payment of obligations close to maturity; (iii) if this is not possible, evaluate the adoption of an alternative in order to avoid incurring non-compliance, such as getting a grace period or rescheduling payment dates (it is important to bear in mind that normally both possibilities shall require the approval of the assembly of bondholders, which due to the State of Emergency decreed by the government, could not be carried out in person for as long as this lasts, so if it is urgent, the Working Group may wish to consider the possibility of holding a non-face-to-face assembly).
Financial ratios. The particular situation of each issuer in terms of income reduction or loss of value of their assets could lead to a default in the financial ratios that it undertook to maintain during the life of the debt instrument. It is important that in this context issuers: (i) monitor closely their financial ratios to ensure compliance; (ii) verify if the act or contract of issue provides for a grace period to remedy such default if it occurs, taking into account that once it has expired, the granting of an additional grace period or any other decision that prevents the early expiration of the Issue or issues shall depend on an agreement of the bondholders assembly or, (iii) evaluate the possibility of raising a possible relaxation of the financial ratios, or some alternative mechanism for granting additional grace periods.
Risk classification. As in the case of financial ratios, the general economic situation and the particular situation of each issuer may lead one or more of the risk rating companies to modify the rating by assigning the issued securities a higher risk rating category downgrade). Given this possibility, it is advisable for issuers to: (i) verify whether their Contracts foresee this situation as an event of default, as well as their results or consequences, in order to adopt any of the measures suggested in the previous points; and, (ii) work with the risk classification company so that the updated risk classification adequately reflects (i.e. not magnified) the eventual impact on the level of risk.
Substantially Adverse Effect. It is usual for the Contracts to foresee that the existence of certain events that generate any relevant negative effect on the issuer or the issues constitute an event of default. Each Contract defines in a particular way the scope and consequences of such event, so it is important that issuers review their respective terms in order to anticipate a potential situation as described, as well as their results or consequences, in such a way that they can take the forecasts or measures referred to above.
Cross defaults (cross default or cross acceleration). It is possible that the Contracts foresee that the default in the payment of other financial obligations or under the terms of other contracts may constitute default events. In such case, it is suggested that issuers: (i) evaluate whether their respective Contract contemplates any of these situations as events of default, as well as their consequences or results; (ii) consider to what extent the current situation could generate defaults in other contracts or obligations and if such defaults meet the relevant criterion established in the Contract; and, (iii) if applicable, take any of the measures described above
REGARDING FUTURE ISSUES
Due diligence. Issuers must be prepared to discuss with the structuring agency the current or possible future impact generated by the health crisis, and the measures that the government, companies and individuals have adopted or are adopting in response to it, in relevant aspects such as possible defaults of contracts, changes in income, restrictions in the workforce, changes in liquidity conditions. Likewise, the relevance of including information in the respective information leaflet should be discussed with the structuring entity. Said information could be collected in the “Risk Factors” section, which should also be reviewed in its entirety in order to verify that the risks identified in light of this situation or other similar ones continue to be adequately disclosed. Another section that could be evaluated and supplemented is the one corresponding to “Management’s analysis and discussion about the results of operations and the economic and financial situation”, so that investors have a full understanding of the important changes that have occurred and the trends and possible strategies to be followed in the future in the face of the health emergency situation.
Risk classifications. Issuers should also be prepared to discuss the aforementioned aspects with risk rating companies when updating their current risk ratings or obtaining new risk ratings for their issues, so that they adequately reflect the current or potential effect of such situations.
REGARDING THE MARKET OBLIGATIONS
Temporary information. The obligation to disclose important facts has not been suspended, nor has the deadline for its submission been made more flexible. Therefore, issuers must be vigilant to report in a timely manner about the situations that may arise for their operations and prospects as a result of the described situation, which they qualify as significant events.
Periodic information. Taking into account that the Securities Market Superintendent has by resolution extended the deadlines for the submission of periodic information (extension that does not operate for companies that are under the supervision of the SBS), issuers must prepare to approve and timely submit, within the new approved deadlines, their financial information, annual reports and updated information on the economic group. In addition, issuers should analyze the relevance of including in their annual report or annual information document, information derived from the health crisis caused by COVID-19 as part of the section referring to significant events that occurred after the end of the year.
Non-face-to-face meetings. Issuers may consider the possibility of including in their respective statutes the mechanisms for holding non-face-to-face shareholders’ meetings, in accordance with the options provided in the General Companies Act. Likewise, they should be alert to the implementation of the additional mechanisms provided for issuers with securities registered in the Public Securities Market Register
