Torys Business Brief: The search for liquidity: lending solutions in crisis recovery

Torys Business Brief focuses on key issues and actionable knowledge for businesses to emerge from the COVID-19 crisis resilient and well-positioned for the future. Each episode of Torys Business Brief features in-depth, accessible interviews with Torys lawyers, moderated by Munk Debates convener Rudyard Griffiths. These episodes are accredited for CPD purposes.

As the economy continues to move toward recovery from the pandemic, and companies look ahead to the next quarter of reporting, liquidity remains top of mind. On our final episode for this series of Torys Business Brief, Toronto partner Amanda Balasubramanian and New York partner Darien Leung speak on pressing lending issues in Canada and the United States. This episode’s discussion includes accessing liquidity and government recovery programs established on both sides of the border, how the lending markets are expected to evolve post-pandemic, and what CFOs should be considering right now.

A full episode transcript follows.

Rudyard Griffiths (00:02): Hello, and welcome to Torys Business Brief. I’m Rudyard Griffiths. You may know me as the convener of the Munk Debates, where we bring together the world’s brightest minds and sharpest thinkers to debate the big issues of the day. As the host of Torys Business Brief, my role is to provide you the listener with compelling conversation about the legal challenges the COVID-19 pandemic presents for businesses and business leaders.

RG (00:30): We are all still taking stock of the ongoing effects of the pandemic. As the world continues to respond, businesses have wide ranging issues to consider. This podcast will equip you with actionable knowledge your business can use to emerge from the current crisis, resilient and ready to thrive. To do this, I’ll be drawing on the expertise and insights of the lawyers working at the firm named Corporate Law Firm of the Year by Chambers and Partners, Torys LLP.

RG (01:29): Today’s episode will be our last installment in this series of Torys Business Brief. To round out the series, we’ll talk to Torys’ New York Partner Darien Leung and Torys’ Toronto Partner, Amanda Balasubramanian, who will share their thoughts on this state of the lending market from both a Canadian and U.S. perspective.

RG (01:52): Darien Leung has a broad-based commercial finance practice and expertise with secured and unsecured credit facilities, asset-based finance, acquisition finance, real estate finance, and subordinated debt and mezzanine facilities. She advises financial institutions, pension funds, and other alternative lenders, as well as private equity sponsors and institutional borrowers in domestic and international transactions.

RG (02:23): Amanda Balasubramanian is the Co-Head of the firm’s Banking and Debt Finance practice, where she focuses on commercial banking and debt financings. Amanda represents both lenders and borrowers in complex domestic, cross-border and international transactions, including syndicated loans, leveraged finance, private equity, acquisition financing, financial financings, and public and private offerings of debt securities.

RG (02:53): Darien, Amanda, welcome to Torys Business Brief.

Amanda Balasubramanian (02:57): Great. Thank you very much.

Darien Leung (02:58): Thank you.

RG (03:00): I’m really looking forward to this conversation. The lending market is going to be critical to our post-COVID recovery agenda, how this economy bounces back and the extent to which corporations and businesses can access capital in a timely and effective manner to pursue, let’s hope, the chance to build their businesses as this pandemic plays out.

RG (03:28): So I want to begin, I guess, by maybe taking first a look back. And Amanda, maybe just start with you. This has been a pretty remarkable three months when it comes to lending and credit. If I was to challenge you to say, what’s really stood out for you in your experiences dealing with clients and businesses over the last three months when it comes to lending and the availability of credit, what would be the thing that would strike you most as having defined this era of intense crisis? And now let’s hope we’re moving into something that’s different.

AB (04:01): Well, I think that what’s been most defining about this crisis, starting in March when everything first shut down is really, I think, every company has worried about their ability to continue to access liquidity, to access their credit lines. And we have spent a lot of time with all of our clients, both on the borrower and the lender side in reviewing their credit agreements with them and trying to find where are the spots where they may trip up, either be it in meeting their financial covenant obligations such that the banks could not fund their lines or the occurrence of any other event that trips them up. So really, it’s been an intense analysis of credit agreements and the obligations that companies have agreed to and whether or not they can meet those obligations and continue to have access to their credit lines.

RG (04:59): Thanks, Amanda. What’s your experience been like, Darien, for the last three months? What really stands out for you as having been top of mind on the part of businesses and business leaders as we face the first few intense months of COVID-19 and its impact on the economy?

DL (05:16): Well, I think it’s been an interesting evolution to see how mid-March, everything came to a screeching halt and nobody really knew what to expect. We didn’t know if this was going to be an issue for a few weeks, a few months. And so, I agree with Amanda, we’ve spent a lot of time with our borrower clients looking at their documents, their credit facilities, and trying to understand how they can maintain liquidity and how they can make it through for the next couple of quarters.

DL (05:53): One thing I will say that I found to be very much a positive element to all of this is how the lenders and the borrowers, the original sense was that we were all in this together. In other words, the banks weren’t going to pull the plug right away. Now this may change in a few quarters, which we can talk about. But I think there was a real sense of trying to be reasonable within the bounds of reasonableness and work through this because everybody, the banks and the borrowers have something to lose if we don’t get through this period.

RG (06:35): Those are important insights. So, let’s speed the clock up to where we’re at today, Amanda, and talk a little bit about the current environment. Because again, we’ve gone through the acute phase. We’ve seen capital markets rebound back, at least in the United States, getting close to their 2020 January highs. How has the conversation changed right now? What are you seeing happening in terms of how lenders and debtors are talking to each other and the issues that are now top of mind versus those of two to three months ago?

AB (07:13): Well, I think that interestingly, the issues that were top of mind at the end of March are also still the same issues that are top of mind now as we get close to the end of June. Because though the capital markets may be coming back in the U.S., companies still have not had any revenue, and it’s still unclear when things are going to get back together and it’s still unclear how long the recovery trend is going to be. And so, where you have borrowers that perhaps were able to meet their quarterly testing obligations in March, those quarterly testing obligations are coming up again in June, and then of course coming up again at the end of September. So those borrowers that were able to skate by the March testing have their eyes very much focused on what’s going to happen at the end of this month and where are things at.

AB (08:03): So I think in a lot of ways, the conversation is still the same. Borrowers are still looking for accommodations from their lenders in terms of meeting their financial covenants. And I think in a way the conversation about whether or not material adverse effects has occurred on a borrower is a conversation that’s maybe getting a little bit more attention than it did in March. That was a concern at the very beginning, but because it was so new everybody took the view that, well, an MAE has not yet occurred on these businesses. But as this shutdown continues, that conversation circles around again.

RG (08:39): Sorry, Amanda, just for the benefit of our listeners. An MAE, just for the lay person, what is that?

AB (08:44): Oh, sorry. My apologies. So that’s the acronym that we use in the lending world and it comes up too in other contracts. So an MAE refers to a material adverse event or material adverse effects. And most credit agreements in Canada will have a requirement in the agreement, usually as a condition to drawing down that a borrower can represent to its lender that no event has occurred which has had a material adverse effect on the business of the borrower. And so that is, in a Canadian credit agreement, is typically a draw requirement. It can also be an event of default.

AB (09:23): So if a material adverse effect on the business occurs, then the lenders can use that as a reason to not make any further advances. So that’s been a primary focus of borrowers, and as the shutdown continues, the question of whether or not an event has occurred that has had material adverse effect on the business of a borrower becomes one that is a little bit more difficult to answer. So, I think that that is certainly something that borrowers and lenders are focused on as this continues.

RG (09:54): Thanks, Amanda. This is really interesting stuff. Let’s dig a bit deeper here, Darien. How could you not say that there has been a massive external effect on these businesses that they’ve had no control over, especially as we see just happening right now in the greater Toronto region, an extension of a lot of the preventative measures that have been in place around this pandemic potentially through to the end of June. These businesses are now laboring under obligations set on them by government that they have no control over that must be having just crippling effects to their bottom lines.

DL (10:37): I think that’s, yeah, absolutely. I think there’s no doubt about that. The jurisprudence around MAE clauses—material adverse effect clauses—is it’s not frequently litigated and it really is more of a nuclear option for lenders. It has been in the past, it’s got a very high standard and for a lender to call it, there’s a lot of reputational risk there. So, it’s almost like a game of chicken in a way for lenders, but the key here is that you need to demonstrate a longterm significant impact.

DL (11:14): Now it feels like we’ve been in this forever. I know, I feel like I’ve been in this forever, but it’s really only been since March. And what we’ve seen in terms of the amendments, the activity we’ve seen for the credit facilities and what borrowers and lenders are doing now is they’re carving COVID out from their MAE clauses sometime between current to September, current to December. So, the idea being that everybody’s suffering from this situation, and in theory, these businesses were doing just fine before COVID happened. And granted, this has been a terrible disruption, but we all hope and believe that business will get back to normal. So I think there is that element to it.

DL (12:07): Another thing that’s related that you touched on. Obviously there haven’t been ... Revenues have basically come to us to a halt. Amanda said this, mentioned this. And some lenders are agreeing that they’ll disregard Q1 and Q2 numbers. So, they’ll look when they’re measuring compliance with debt covenants and interest charge maintenance. So, I think that we’ll really not see the shakeout until Q3. Really, I think we’re going to make it through to the end of the year and that’s when things are to change, I think, in this market.

RG (12:52): Thank you, Darien. That’s a perfect segue to now pivot our discussion to, well, what’s going to happen next, because I think that’s what we’re all interested in. And Amanda to begin with you, you had mentioned at the beginning that the lenders were generally accommodating, understanding that everyone was in this together with risk appropriated across the spectrum. Do you sense that the lender’s view is starting to change? That obviously they have shareholders, they have their own capital that they need to protect. Are lenders still having this slightly more laissez-faire view towards their debtors or is the tone of those conversations starting to shift?

AB (13:38): I think that we’re seeing lenders still be accommodating to borrowers. I think it’s certainly in both the borrower and the lenders best interest to find a solution to any problems that borrowers are in. I think turning off the taps and forcing companies and to CCAA or bankruptcy is really not in the best interest of the lenders. So, I don’t think that that’s their agenda.

AB (14:04): We do see though, lenders looking for a little bit more in terms of the restrictions, the quid pro quo, if you want to call it that in terms of restrictions in the credit agreement. So, if a borrower is coming to a lender and saying, "Okay, we now have our forecast for Q3 and it’s not looking like we’re going to meet our financial covenants. We need to amend the agreement to give ourselves some more space in order to meet those covenants."

AB (14:30): Lenders are being a little bit more forward-thinking, I think, in terms of other restrictions. So, things like adding restrictions on distribution so the company’s not able to benefit its shareholders during this time or adding restrictions on the ability to do acquisitions or other types of covenants. So, we’re certainly seeing that, but obviously we can’t predict the future, but I’d be really surprised if the Canadian banks take an aggressive approach and start to change their tune in terms of being accommodating for borrowers.

DL (15:10): Amanda and I, I think we’re on the same page and I agree completely. It’s too soon at this point, really things haven’t quite changed yet. We haven’t pivoted yet, but we are seeing a change in the market in that a lot of the cash that comes in on the lender side comes from CLOs and they’re investing in the market and they’re seeing their bank loans ratings dropping. So, they’re starting to invest now in high yield debt, and that’s going to have an interesting effect on the market.

DL (15:48): Also, projected rates of default for loans right now is projected to be 5% by the end of the year. Last year, it was 1.8%. So there will be fallout, but I think the point is there’s just too much uncertainty at this point beyond what Amanda was talking about, which is let’s tighten up our covenant so that we can hold fast, as long as possible. But we hope, but we don’t know what’s going to happen.

RG (16:21): Thanks for listening to Torys Business Brief. For more information on how organizations and business leaders should be addressing the challenges of the COVID-19 pandemic, visit Here, you’ll find a wealth of in-depth resources featuring the analysis and insights of Torys lawyers. Again, that website is

RG (16:47): Well, let’s talk about some of the strategies that are out there for companies to shore up a balance sheets in that search for liquidity. Because I think what I’m hearing from you is that’s going to be the challenge over the next six months to a year, which is how do you sustain the liquidity to continue to have a viable operating business that has that potential to grow, hopefully when this pandemic has passed?

RG (17:13): So maybe, Amanda let’s first talk a little bit about the government programs, and I think the benefit of having both you and Darien on this call is you can provide us with that Canada/U.S. perspective. So, Amanda, maybe you could give us a sense of where things stand right now in Canada in terms of government programs and the extent to which you see clients accessing them. Have they been successful in the design to the extent to which you’re seeing a demand from your corporate clients?

AB (17:44): So the two main liquidity programs that the Canadian government has put into place are the Business Credit Availability Program, which is we call the BCAP program, and then the Large Employer Emergency Financing Facility, which we call the LEEFF program. Obviously, there’s been a ton of other programs, but those are the two main programs that have been focused on liquidity across all sectors in Canada.

AB (18:11): The BCAP program came out first and that one was really geared to small and medium sized businesses. It was small loans that are provided by the Business Development Bank of Canada and loan guarantees and some other financial support by the Export Development Canada, and they’re quite small. When they first came out, they were limited $6.5 million each, and you could apply under to both. So max, you get $12.5 million of liquidity. So, we didn’t see a lot of our clients accessing that because typically our clients tend to be in a bigger bracket. So, the smaller facilities were not that helpful to them.

AB (18:51): The LEEFF program was announced in May, at the beginning of May, and that is geared to large Canadian businesses. So I think the requirement is that annual revenues be around $300 million or higher, and that’s intended to provide liquidity support for large companies, loans in the range of $60 million and higher. So that program was announced at the beginning of May and applications opened for that program a couple of weeks ago. So that is still very new and we’ve yet to see whether or not that program is effective in helping businesses.

AB (19:30): But the thing to remember about the LEEFF program is it’s intended to be a bridge financing facility for companies that cannot access capital anywhere else. So, they’ve exhausted their ability to get new capital from their regular sources, from the banks, and so then they turn to Canada for this special loan. So, we’ve yet to see whether or not that that is effective, but it is there as a lifeline for companies that can’t otherwise find their way to get across the river. So time will tell as to whether or not that is effective for people or not.

RG (20:04): Thanks, Amanda. Now, Darien, in the United States, a different set of programs, some similarities. But what would you see as the difference in terms of philosophy or approach in the United States versus Canada to providing businesses with ongoing liquidity and support?

DL (20:22): Yeah. So, in the U.S., Congress put together a program. The first loan program is the Payroll Protection Program. And the idea was really just to allow companies to keep people on the payroll, and so the larger companies applied for these loans, but it’s really intended for the smaller companies. A limited amount, you could use, originally, it was, I think, 75–80% to be applied to payroll and the rest to utilities and rent, very limited, and then that debt would be forgiven. They’ve just announced an expansion of the program so that you have a longer amount of time to apply the funds and more of it can be used towards payroll. And even if you don’t comply with those rules for forgiveness, it’s still a very low interest loan that is paid back in five years. So, it’s a nice source of liquidity.

DL (21:40): There were criticisms of the program because initially the way it works is they look at the number of employees that you have and if you have more than a certain number of employees, you’re out of the box and the idea being that if it’s a really large company, you have other sources of liquidity. But hospitality was exempt from this, so you saw large companies like Shake Shack, they had tons of employees around the world, frankly, although this has to be used in the U.S., and they were taking advantage of these loan programs. And they ultimately gave the money back because, again, they had other sources of liquidity. So, there were kinks there. But it’s funny, we have clients, large and small, who have applied for those loans, and it’s worked out.

DL (22:43): The other program is the Main Street Lending Program, and that’s more of a long-term credit arrangement, term loans really, and there are three types. One is the new loan facility and the other is secured loans, priority loans, and then the last one is the upsized tranche loans. So, the idea being that on the latter one, you can borrow between $10 and $200 million. But it’s if you have an existing credit facility with a group of banks or really a single bank, but really, it’s intended to be used for multi-lender facilities and you can borrow an additional amount. And it’s subsidized, the banks are subsidized essentially or backstopped by the government. The interest rate is fixed at LIBOR plus three, and the amortization limited and they’re all payable within five years.

DL (23:50): So that program hasn’t been put into place yet. We’re expecting it will be next week, but it’s been slower to the details to be sorted out.

RG (24:35): Amanda, one thing we’ve seen is, again, we talked about it earlier in the program, a stock market roaring back. We’ve seen companies doing new equity issues, take advantage of rebounding stock prices, a bond market that similarly has some real strength thanks to Central Bank intervention and buying of investment grade debt in the United States, even so-called junk debt being purchased by the U.S. Federal Reserve. Are you seeing more Canadian companies taking advantage of either the equity market or the bond market now as a liquidity strategy or is that something that’s still on hold?

AB (25:14): I think that we’re certainly seeing companies start to poke at that and take a run at the bond markets and the equity markets. In Canada, we haven’t seen the kind of activity in the bond market though as our U.S. colleagues have seen. So, I think that that’s still going to take a little bit here in Canada to kick back up. But, definitely, companies that have the option to access the equity markets as a means of security liquidity are certainly seriously looking at that option and weighing whether or not it makes sense for them at this time.

RG (25:50): And Darien in the United States, again, you have the NASDAQ now at all-time highs, you’ve got the S&P similarly back to what were already very impressive levels of January, 2020. Does that mean that maybe some of these government programs are less attractive to corporations because of increased market capitalization and the extent to which, as Amanda just mentioned, you have a very active bond market in the United States. Again, thanks largely to the Federal Central Bank’s interventions. Do you think there’s an ability here maybe for government to pass the lift here, the load over for the recovery onto the markets as opposed to the U.S. taxpayer or the balance sheet of the U.S. Federal Reserve?

DL (26:44): Well, that’s definitely where it’s going to have to come from for several reasons, at least here in the States. But I think one thing we need to keep in mind is there’s a difference between activity and actual new money raising. Yes, there’s a lot of activity in the high yield market, but there aren’t a lot of new loan originations just like there aren’t a lot of equity issuances. We’re not seeing much in terms of equity issuances to raise capital. I think we’re, again, we’re in a holding pattern, and so I wouldn’t look at the stock market activity today as an indication of a growth in liquidity or an increase in liquidity for these companies.

DL (27:36): I think what we’re going to see is, as default, this is the cycle, right, as we see defaults happen in the next few quarters, we’re going to see the M&A market heat up. Look, the money that existed that the private equity had and the capitalization that the banks had, it didn’t technically really go away. It’s still there. But the transactions you’re seeing today are the ones that were either in process previously or extremely opportunistic. But frankly, you’re not going to enter into a new deal unless there is a real reason for doing it today. You’re going to wait six months to a year, depending on how everything shakes out.

RG (28:25): That makes a lot of sense. So to wrap up our conversation, it’d be good, I think, to get both of you to provide our listeners with a bit of a sense of your feeling as to where things will go over the mid to longer term. So, stretching out into 2021, 2022.

RG (28:43): Amanda, maybe if you could wrap up for us first. Do you see a return to quote "normal" within the lending space in Canada? Do you see that this pandemic could cause some changes either in behavior or in policy that could end up being permanent and that maybe businesses and business leaders should be thinking about as new features in the Canadian landscape?

AB (29:11): I think that as we move towards the end of 2020 and get into 2021 and put 2020 behind us, I see the loan markets returning to where they were. I don’t see any sort of lasting changes in approach or philosophy. Perhaps there will be some creativity during this period in terms of ways that we address certain problems and credit agreements that may survive. Certainly, things like definitions that apply to financial covenants as we are being creative in how to address problems that companies are having. Those creative drafting solutions may survive into the future. But generally speaking, I think that once companies can get back to business and get back to normal, I don’t see any long-term effects that’s going to fundamentally change the way that we approach the loan market in Canada.

RG (30:11): So Darien, just to have you a wrap up for us with the U.S. perspective. Do you share Amanda’s view that markets are going to fundamentally return to normal, that the legal framework around markets, around lenders, debtors and creditors will remain pretty much the same? Or do you think that there could be some lasting legacies either on the policy side or in terms of that legal framework that evolve out of this crisis?

DL (30:41): Right. Look, after the mortgage crisis in 2007/2008, we did see legislation come out of that to shore up the banking system, Dodd-Frank and related legislation, because there was a reason for what happened that could have been managed by the government in a better way. This just happened. The market was going as well as could be. We were always talking about a recession on the horizon, but with a trillion dollars, over a trillion dollars in the debt markets at the end of 2019, and growth, consistent growth for the last 10 years. This didn’t happen because of a failure in the markets. This happened because of a different kind of failure, I suppose. And I think the opportunity is going to come around that is more of a commercial type in terms of ... I mean, all of our lives have changed dramatically, so there are going to be different ways of doing business, but I don’t think that this crisis we’re going through right now is evidence of a systemic market failure.

RG (32:02): Great. And then just finally, for both of you, if you had one key piece of advice that you’re giving to clients right now who are thinking through these challenges, what would that be? Amanda, you first, and then I’ll give Darien the last word.

AB (32:18): One key piece of advice. Well, I think bringing it back to the credit documentation, I think that the one key thing is for CFOs or treasurers or those who are responsible for ensuring compliance with credit agreements, for them to stay on top of their covenants. To stay on top of those requirements and to not put themselves in a situation where they’re inadvertently offside their credit agreement. Because now it’s not the time when you want to be going to the lenders and saying, "We screwed up, we made a mistake, we’re offside, please waive this event of default.” So, I think ensuring that you stay on top of your obligations and your covenants and your credit documentation is really a number one thing that people should be considering right now.

RG (33:07): Thanks, Amanda. That’s great focused advice. Darien, I’m going to give you the last word and the same question.

DL (33:13): And unfortunately, I’m not going to top what Amanda said. I agree with her completely. Now is the time, and it has been for the last few months, to really clean up your house, clean up house and make sure you’re in compliance. And also, to the extent that it’s appropriate, keep your relationships close with your banks, with your other sources of financial support. Because this is going to be a difficult period in the next couple of quarters and it’s going to require a lot of cooperation. And I think that to the extent our clients can build on that with, frankly, with each other, that will be extremely helpful.

RG (34:08): Well, Darien, Amanda, I want to thank you for a really substantive, rich discussion. I’ve certainly learned a lot and I know our listeners have too. So, appreciate your time, appreciate your insights, and appreciate this conversation.

DL (34:23): Thanks so much.

AB (34:24): Great. Thank you very much for having us.

RG (34:38): Well, that rounds out this first series of Torys Business Brief. We’ll be taking a short break over the summer and returning in the fall of 2020 with more insights on the key issues affecting your business. Head to to see the firm’s latest webinars and insights, and be sure to subscribe to Torys’ mailing list to receive these updates in real time. You can do that at

RG (35:29): Thank you for listening to Torys Business Brief. I’m your host, Rudyard Griffiths.

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