The COVID-19 pandemic has resulted in unprecedented economic challenges for numerous industries throughout the world that have put tremendous stress on the global financial markets. As a result, numerous companies have been considering ways to manage their liquidity as they manage the adverse impacts of the COVID-19 pandemic on their business. Companies with revolving credit lines have been drawing down their revolving capacity and their financial investors have been encouraging this utilization of their revolving credit lines to enhance their liquidity position.

When accessing revolving credit lines, companies should carefully consider the funding conditions required by the terms of their specific facility. Typically, there are two primary funding conditions in most revolving credit lines.

• Representations and Warranties—a company must bring-down the representations and warranties in their revolving credit lines, the most salient of which is a representation that there has been no material adverse effect (MAE) on the business, property, operations, or financial condition of the company. In the middle market and/or in the venture technology lending markets, there may also be a specific condition whereby the borrower is required to certify as to the absence of an MAE.
• No Default or Event of Default—a company must certify that there is no default or event of default existing at the time of request of the borrowing.

The analysis of whether an MAE has occurred is highly fact-specific and the relevant case law has not established any bright-line tests or quantitative rule of thumb that can be relied upon to assert the presence or absence of an MAE. The focus of such analysis is determining both the materiality of the event or condition and the expected duration. With this in mind, the company should analyze on a holistic basis all of the factual circumstances, including the direct and indirect impacts of the COVID-19 pandemic on the company's business.

A company should consider the impact of increased borrowings on other covenants applicable in its revolving credit line. To the extent that the company has financial maintenance covenants or springing financial maintenance covenants, consideration should be given as to the impact of increased leverage levels on the company's ability to comply with such financial maintenance covenants. In addition, increased leverage levels may impact applicable interest rate margins on outstanding loans and/or mandatory excess cash flow sweep calculations.