Written byA material adverse change is a significant deterioration in your financial position that, under a MAC clause, lets a lender decline to fund a facility or demand repayment.
Also known as: MAC clause, material adverse effect, MAE
Key points
- The clause is the lender's escape hatch between approval and settlement, and often a continuing condition after drawdown.
- Contracts rarely define "material" precisely, so a lot rests on the lender's judgement and on how the clause is drafted.
- Common triggers include losing a major customer, a large legal claim, or a sharp fall in trading revenue.
- A commitment letter subject to no material adverse change is not the same as unconditional finance.
How a material adverse change clause works
A finance approval rests on a snapshot: the accounts, contracts and trading position the lender saw when it said yes. A material adverse change clause protects that snapshot. If something significant goes wrong between approval and settlement, the lender can decline to fund. Where the clause keeps running after settlement, a serious downturn can also become an event of default alongside the usual covenants.
The clause turns up in three places: as a condition that must be satisfied before drawdown, as a statement you repeat every time you draw, and as an event of default. Each version has a different effect, so it pays to know which one you have signed.
What counts as material
Most contracts leave "material" undefined, or define it by effect: a change that seriously affects your ability to meet your obligations. A well drafted clause is aimed at serious, lasting change. A short term dip, or a problem the lender already knew about when it approved the finance, would not usually be enough.
In practice lenders rarely call a material adverse change out of nowhere, because doing so invites a dispute. It is used more often as leverage to reopen the terms, ask for extra security or tighten reporting once credit risk has clearly shifted.
What borrowers can do about it
You will rarely get the clause deleted, but you can tighten it. The usual asks are an objective test tied to your reported accounts, a carve out for events already disclosed or affecting the whole industry, and a requirement that the lender act reasonably and give notice before acting.
Timing helps as well. The shorter the gap between approval and settlement, the less room there is for something to change. Keep the lender informed if trading moves, because a lender that hears the news from you usually handles it better than one that finds it in your next accounts. If you are buying an asset or a business, check that the finance condition and the purchase contract line up.
Example
A civil contractor is approved for a $400,000 excavator facility, with settlement six weeks away while the machine is shipped. Three weeks in, the contractor loses the council contract that made up most of its forward work and tells the financier straight away. Because the approval is subject to no material adverse change, the financier reopens the file, asks for updated figures and requires extra security before it settles. The finance still goes ahead, on different terms. That is a more common outcome than an outright refusal.
Not to be confused with
- Covenants
- covenants are specific promises you must keep, while a material adverse change clause is deliberately general
- Commitment letter
- a commitment letter sets out the offer, and the clause is the condition that can withdraw it
Frequently asked questions
How does a material adverse change clause work?
It lets the lender stop or unwind the deal if your position gets significantly worse than it was at approval. Depending on the drafting, the lender can refuse to fund at settlement, block further drawdowns, or treat the change as an event of default under the contract.
What counts as a material adverse change?
Something serious enough to affect your ability to meet the contract: losing a customer that drives most of your revenue, a major legal claim, insolvency of a key supplier, or a sharp and sustained fall in trading. A temporary wobble or a known issue usually does not count.
Can a lender withdraw approval before settlement?
Yes, if the approval was conditional and a condition is no longer met. That is exactly what this clause is for. It is one reason approvals are described as conditional until settlement, and why brokers push to keep the window between approval and settlement short.
Can you negotiate a material adverse change clause?
Usually you can narrow it rather than remove it. Ask for a test tied to your reported financials, exclusions for disclosed or industry wide events, notice before the lender acts, and a chance to fix the problem. Have your lawyer review the wording before you sign.
What is the difference between a MAC clause and a covenant?
A covenant is a specific, measurable promise, such as keeping a ratio above a set level or lodging accounts on time. A material adverse change clause is broad and judgement based. Covenants tell you exactly where the line sits, while this clause deliberately does not.
Related terms
Covenants
Covenants are promises, obligations or restrictions written into a contract or recorded on land title that bind the parties, such as a borrower's promise to maintain minimum interest cover.
Read definitionFacility letter
A facility letter is a lender's written confirmation of the terms on which it proposes to provide a loan or other finance facility to a borrower.
Read definitionCommitment letter
A commitment letter is a document from a lender confirming it will provide a specified amount of finance on stated terms, subject to listed conditions being met before drawdown.
Read definitionDefault
A default is a borrower's failure to meet the terms of a credit contract, usually by missing repayments, which lets the lender demand the balance and enforce its security.
Read definitionDrawdown
A drawdown is a borrower taking funds under an approved loan facility, in one payment or in stages, once the lender's conditions have been met.
Read definitionCredit risk
Credit risk is the possibility that a borrower or counterparty will default on their contractual repayments, leaving the lender or investor with a loss.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.