What are MAE clauses?
Material Adverse Effect (MAE) clauses are used to protect a lender’s position against the risk of a negative impact on a borrower’s business in the event of unforeseen events and are common in finance documents.
As the COVID-19 crisis has developed, lenders have become increasingly concerned about recovering loans made to businesses that are particularly exposed to the COVID-19 crisis (notably in the hospitality, logistics, manufacturing and aviation sectors) and could therefore be at increased risk of bankruptcy. As a result, there has been fresh focus on whether lenders may consider relying on existing MAE clauses in their financing documents, with borrowers concerned as to the vulnerability of existing funding arrangements to MAE triggers where their credit and businesses have not been otherwise effected by the crisis in the short-term.
How are MAE clauses used in financing documents?
In financing documentation, the concept of MAE can be used both as an effect qualifier with primary benefits for the borrower, where for example, a borrower represents that no litigation, arbitration or administrative proceedings have been initiated against it which would have a material adverse effect and also as a standalone concept with primary benefit to the lender, for example, a borrower represents that no material adverse effect or material adverse change has occurred with respect to its business or financial condition since a specific date.
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