Material adverse change

A material adverse change (MAC) provision allocates the risk of a significant deterioration in the borrower's business, financial condition, prospects, or related matters. In facility agreements it may appear as a representation, as an event of default, as a condition to draw, or as several of these at once. The related definition is usually "Material Adverse Effect".

How material adverse change is used on PF and CRE desks

Project finance and CRE teams negotiate MAC language at term sheet and documentation stages because it can drawstop utilisations or support acceleration when specific covenants and defaults do not yet bite. Before financial close, a business MAC may also sit in commitment papers as a condition to funding. After close, desks treat a declared MAC as exceptional: quantified covenant breach and payment or cross default triggers are the everyday enforcement path.

The ACT Borrower's Guide to LMA investment grade documentation notes that Clause 23.12 (Material Adverse Change) is left blank for the parties to settle. Inclusion of a MAC event of default is fairly common, but a significant number of stronger borrowers delete it, arguing that other representations, covenants, and events of default already protect lenders. Where leveraged-style wording hinges on the "reasonable view of Majority Lenders", borrowers often push for an objective test and a tighter Material Adverse Effect definition. A separate, usually non-repeating representation that there has been no material adverse change since a stated accounts date is more widely accepted.

CABRI similarly records that MAC events of default are negotiable and sometimes avoided altogether, and that vagueness can make the clause hard for lenders to rely on in borderline cases.

Mechanics and drafting scope

A Material Adverse Effect definition typically covers material adverse effect on:

• the business, operations, property, condition (financial or otherwise) or prospects of the group
• the ability of obligors to perform under the finance documents
• the validity, enforceability, or ranking of rights and security under the finance documents

Negotiation focuses on whose opinion counts, whether "prospects" are included, whether the test is forward-looking ("is reasonably likely to have"), entity scope (group versus obligors), and carve-outs for known risks, market-wide events, or matters disclosed in due diligence. MAC is distinct from force majeure, which addresses impossibility or delay in contractual performance from defined external events in commercial contracts, not lender acceleration rights under a facility.

Distinctions

A ratio miss is a quantified covenant breach. Cross default imports another creditor's default rights. Material adverse change is a residual, qualitative trigger. Lenders may prefer it as a drawstop or representation rather than as a standalone acceleration event precisely because calling MAC is fact-sensitive. Deleting the event of default while keeping a signing representation is a common compromise on investment grade and strong project finance credits.