Clifford Chance

Coronavirus: Leveraged Finance - Key considerations in respect of delayed audits and reporting covenants

9 April 2020

The Coronavirus (Covid-19) pandemic has coincided with a critical time in the financial reporting cycle for many companies. Those with a 31 December financial year-end and who have not completed their audits are likely engaged in their audit process now, and those with contractual reporting obligations will likely need to submit their annual audited financial statements within the next few weeks. Given the disruption caused by the Coronavirus, however, many year-end audits presently are not able to be completed, due to, inter alia, the impossibility of physical meetings between audit committees, auditors and management, difficulties obtaining internal control evidence and carrying out audit procedures due to social distancing measures and travel restrictions, and issues related to post-balance sheet date changes in business operations. In the United Kingdom, for example, the Financial Reporting Council has advised that "additional time may be required to complete audits and it is important that this is taken, even at the risk of delaying company reporting."

Various regulators across the globe have recognized this issue as well and have provided relief from reporting requirements for public issuers. The U.S. Securities and Exchange Commission (SEC) has granted relief from filing annual financial reports for the time period from 1 March 2020 to 1 July 2020. In the United Kingdom, the Financial Conduct Authority has extended the deadline for reporting annual audited financials by two (2) months, and the European Securities and Markets Authority in Europe has done the same for companies in the European Union. Similarly, the Securities and Futures Commission and the Stock Exchange of Hong Kong have also extended the deadline for issuers to publish annual reports by 60 days and have indicated that a further extension may be warranted. This regulatory response, however, only provides relief in respect of public reporting obligations, but many companies are subject to contractual reporting requirements as a result of their private finance contracts, including, for example, high-yield bond indentures and leveraged loan agreements.

This briefing will focus on some of the key considerations for high-yield bond issuers and sub-investment grade loan borrowers when faced with Covid-19 related audit delays, which vary from those experienced by companies with other financing arrangements, such as investment grade or convertible securities, due to differences in documentation and market practice.

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