Picture this: a borrower is relying on a revolving credit facility to meet working capital needs. Suddenly, it is told by its lender that a “material adverse event” has occurred, and the facility is now being frozen or called. What does this mean, and what can the borrower do?
In a credit agreement, Material Adverse Change (MAC) clauses can be powerful and catch borrowers off-guard. They give lenders the contractual right to withdraw financing in response to a significant deterioration in the borrower’s condition, but it can be difficult to determine when that right can be exercised.
(Note: the terms “material adverse change” and “material adverse effect” (MAE) are often used interchangeably, though some agreements distinguish them such that MAE encompasses a broader range of conditions that prevent the party from performing their loan obligations.)
