Material adverse change (MAC) clauses are a standard provision in facility agreements. MACs operate as a "sweep up", protecting the lender in the event of unforeseeable changes of circumstances.
The classic example is the occurrence of a material adverse change in the borrower’s financial condition or business operations. But as a transaction specific provision, what constitutes a MAC (and who will determine whether one has occurred) is a matter for negotiation between the lender and borrower. Recent case law has shone a light on the interpretation of such clauses, albeit in the context of acquisitions rather than loans.
Definition
The lender will be keen for the MAC definition to be wide in scope and to trigger at an early stage of a change in the borrower’s business or financial circumstances. Lenders might push for subjective wording ("in the opinion of the lender") which might further expand the scope of events which trip the clause. On the other hand, a borrower will want the definition to be narrow and specific, with an objective element ("would reasonably be expected to"), so that it is more difficult for the lender to assert that a MAC has occurred.
Negotiations will depend on various factors, such as:
- the bargaining powers of the parties;
- the borrower’s creditworthiness;
- the market and economic climate at the time of negotiation; and
- the tenure of the loan.
MAC in the warranties and representations
The concept of MAC is used at various places throughout the facility agreement. A lender may require a "no-MAC" representation to be given by the borrower as a second line of defence for the specific representations made. This could also be used to cover gaps in time between information being provided to the lender and the date that the representation is made, such as financial changes which could have an adverse effect on the borrower coming to light after the borrower has provided its financial information and accounts. The lender may require these representations to be repeated on important later dates, such as when a drawdown is made or the dates of payment instalments.
MAC as an event of default
The lender will also want the ability to call an event of default when a MAC occurs (see our podcast A-Z of banking and finance: E is for events of default). The Loan Market Association’s standard drafting includes an event of default which is triggered in circumstances where there is a MAC of "the business, operations, property, condition (financial or otherwise) or prospects of a borrower" taken as a whole.
Following the occurrence of an event of default, the lender will usually be entitled to, amongst other things, demand immediate repayment of the loan and enforce any security given to support that loan. However, relying on a MAC as the basis for taking such steps should be approached with caution because if a lender incorrectly invokes a MAC event of default it may be liable to a breach of contract claim. A lender will therefore often want to wait for a clearer (and less subjective) event of default to occur (such as non-payment of an amount due) before accelerating the loan or taking enforcement steps. However, the threat resulting from the existence of a MAC clause (and arguable occurrence of a MAC) may instead be used by the lender as leverage to re-open the terms of the loan, including to re-cut repayment or interest terms which reflect the change in the borrower’s financial position.
Enforceability – a finance perspective on a recent commercial court judgment
While MAC clauses are included in almost every sophisticated facility agreement, case law on such clauses is somewhat limited, reflecting lenders’ reluctance to use them as the sole basis for the acceleration of a loan.
A recent case in which the court had to consider a MAC clause is BM Brazil I Fundo De Investimento Em Participacoes Multistrategia & Ors v Sibanye BM Brazil (Pty) Ltd & Anor [2024] EWHC 2566 (Comm) (10 October 2024). The case concerned the £1.2bn acquisition of two nickel mines. The buyer sought to terminate the purchase, asserting that a geotechnical event had triggered the MAC clause in the SPA.
The court provided guidance on how it interprets and determines the concept of materiality and whether a potential MAC event is, in fact, material. The court clarified that a "material" change is intended to mean one which is significant or substantial. In a loan context, it might now be difficult for a lender to argue that a MAC clause has been triggered where the borrower demonstrates that it can still comply with its overall financial obligations, despite there being adverse changes to its financial position or business operations, as these may not be deemed sufficiently significant or substantial.
The judge held that for acquisitions that are part of a long-term strategy the important thing is whether the company has suffered a material adverse effect in its business or results of operations that is consequential to the company’s earning power over a commercially reasonable period, and that this would be measured in "years rather than months". It may therefore be pertinent to consider what a commercially reasonable period would look like in the context of a loan. Arguably this judgement will allow greater borrower flexibility in this regard, as a short-term financial wobble may not be "material" if the adverse change will be irrelevant over a "commercially reasonable period".
Matthew Padian
Matt Grant