Material adverse change (“MAC”) or material adverse effect (“MAE”) clauses in Credit Agreements are used primarily as a condition precedent to closing and all borrowings, and the occurrence of a MAC or MAE may also constitute an event of default.  The MAC definition will also be used to qualify representations and warranties, covenants and other terms in the Credit Agreement.

Though MAC definitions will be negotiated, a typical definition would include:

“a material adverse change in the business, assets, properties, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects, of the Borrower, individually, or the Borrower and its Subsidiaries taken as a whole.”

However, there can be disagreement among parties about whether it is proper to include “prospects” in this context.

Borrowers’ and Lenders’ Divergent Views
From a Borrower’s perspective, the MAC determination should be based upon the business’ actual performance as of a certain date, rather than its projected performance (which may or may not come to fruition).  However, a Lender will want to be protected from prospective (and in some cases inevitable) financial and operational events that may affect the borrower’s ability to repay the loans, even though they have not yet resulted in measurable consequences.
Often, whether or not to include the term will come down to which party has more bargaining power in the deal.

Alternative Considerations for Lenders
When faced with a “powerful” Borrower who is able to negotiate out the word “prospects” from a MAC definition, a Lender may want to consider the following alternatives:

  • Revise the MAC clause to read that “there shall have occurred no event that could or would constitute a material adverse change.”  This language is commonly accepted by Borrowers and also covers the forward-looking idea that would otherwise be covered by “prospects”.
  • If the loans have a strong enough guarantee (for example, by a strong parent company), a Lender may be comfortable simply relying on the guarantee to cover forward-looking risks.