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Key Takeaways:

  • A plaintiffs’ firm is filing class actions nationwide claiming that ambient scenting denies chemically sensitive guests equal access under the ADA and state law.
  • The complaints seek brand-wide fragrance bans, removal of scent systems and attorneys’ fees.
  • Hotels, restaurants, and transit operators that use scent should review their programs now and have a response plan ready.

For decades, ADA Title III litigation against hotels, restaurants and transit operators focused on architectural construction-related barriers you could easily measure: ramp slopes, door widths, restroom clearances, parking stalls and accessible paths of travel. A new and fast-growing category of claims targets something you can’t see at all: the signature scent in a hotel lobby, a restaurant dining room, or a train station.

Scenting has become a hallmark of luxury hospitality. Hotels are investing heavily in signature fragrances to attract and keep guests. Professional scent-marketing companies now supply custom fragrances to hotel brands and properties across the country. The plaintiffs’ bar has noticed. Here is what businesses need to know, and what to do now.

A National Campaign Led by One Firm

The current wave started in earnest in May and June 2026. That’s when the Oakland-based firm Cole & Van Note, founded by Scott Edward Cole, Esq., a notable class action attorney, filed a series of class actions over hotel fragrances on behalf of guests with fragrance sensitivities. The firm announced its first filing as “the first of its kind” and said more cases would follow. It called the case “a warning to all businesses pushing synthetic fragrance on their customers and employees.” Indeed, Scott was true to his word because more fragrance sensitivity class actions have been filed.

The firm’s website describes the effort as an “anti-fragrance litigation movement.” It says hotels are at the “[t]op of our list,” but that “ALL types of businesses are being addressed.” Major hotel chains have been named in the first round. The firm has also filed against luxury hospitality and restaurant brands, and it has moved beyond hotels into passenger rail.

The cases have been filed in federal courts in California and Florida, and the firm has continued to file against a broad range of hospitality and retail defendants. In the Florida case, local Florida attorneys appear alongside the lead firm. That arrangement lets the campaign spread into new jurisdictions quickly. The firm’s founder has said publicly that he expects more filings outside California in the coming months. After a recent visit to Las Vegas, he remarked that “[a]t least 95% of the places that I visited had some kind of fragrance.”

Many luxury operators use the same preeminent scent-marketing vendors. That means one vendor’s client list can work as a ready-made target list. Hotels, restaurants, airports, train stations, rail operators, casinos, spas, and flagship retailers that use ambient scenting should assume they are on plaintiffs’ radar. According to the leading fragrance distributor, in more than 20 years of business, these are the first such claims they have experienced.

What the Complaints Demand

The complaints follow a familiar template. They describe synthetic fragrance products, scent-dispersion machines, HVAC-integrated systems, diffusers and plug-ins. They cite statistics on asthma, chemical sensitivity and autism spectrum disorders. They seek nationwide classes of “[a]ll chemically sensitive (disabled) persons residing within the United States.”

The relief they request is aggressive consisting of:

  • brand-wide injunctions banning synthetic fragrance at every U.S. location and requiring scent systems to be decommissioned,
  • decommissioning of scent systems,
  • corrective advertising,
  • an accounting and constructive trust, and
  • attorneys’ fees.

Some complaints also reserve the right to add any party that controls “the environmental conditions” of a defendant’s locations. That language could reach scent vendors, property owners, and management companies.

In California, the complaints also invoke the Unruh Civil Rights Act alongside the ADA. That matters. A private ADA Title III claim allows only injunctive relief and attorneys’ fees, but Unruh provides statutory damages for each violation, which can multiply exposure across a class of guests.

How the Cases Are Unfolding, and What They Cost

Even when these cases go away, they do not necessarily stay away. Some of the early federal filings have been dropped, while others remain in their early stages. The firm has said that some dropped federal cases are being refiled in state court. A business that gets one case dismissed may simply face the same claims again somewhere else.

Even the earliest phases take time and money. In the passenger rail case, the first several months alone included all the following:

  • pro hac vice applications,
  • pretrial and discovery-procedure orders,
  • referral to a magistrate judge,
  • extensions of the response deadline,
  • disputes over scheduling conferences, and
  • a new complaint that changed which defendants were in the case.

If a case gets past the pleadings, a defendant faces costly fights over toxicology and indoor-air-quality experts, property-by-property inspections and class certification. It also faces reputational harm from public allegations that its premises are “toxic.” The complaints already invoke formaldehyde, phthalates and California’s Proposition 65. Industry observers advise businesses to check whether their insurance would even cover defense costs for claims like these.

Stay Ahead of the Next Complaint

Businesses that are growing and building new hotels, restaurants, stations, on trains and in terminals should treat fragrance as a compliance issue, not just a branding decision. Before a claim arrives, we recommend these steps:

  • Inventory your scent programs and vendor contracts, including the indemnity and insurance terms.
  • Adopt a clear, guest-facing fragrance statement that invites guests to raise concerns at any time and describes a case-by-case accommodation process.
  • Train front-line staff to recognize fragrance-related accommodation requests and escalate them to a designated contact who knows the scent program and the steps available to address a guest’s concerns.
  • Review your marketing language about air quality and the guest environment.
  • Build scent design into pre-opening accessibility review for new properties, stations and routes.
  • Put an early-response plan in place before a demand letter arrives.

If a demand letter or complaint arrives:

  • Take a deep breath, take it seriously, and do not ignore it.
  • Preserve all records about your scent program from its inception, including products, devices, locations and vendor communications.
  • Notify your insurer and your scent vendor promptly.
  • Call experienced ADA defense counsel before responding to plaintiffs’ counsel.

This article was originally published on Hotel-Online.com.

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Key Takeaways:

  • A plaintiffs’ firm is filing class actions nationwide claiming that ambient scenting denies chemically sensitive guests equal access under the ADA and state law.
  • The complaints seek brand-wide fragrance bans, removal of scent systems and attorneys’ fees.
  • Hotels, restaurants, and transit operators that use scent should review their programs now and have a response plan ready.

For decades, ADA Title III litigation against hotels, restaurants and transit operators focused on architectural construction-related barriers you could easily measure: ramp slopes, door widths, restroom clearances, parking stalls and accessible paths of travel. A new and fast-growing category of claims targets something you can’t see at all: the signature scent in a hotel lobby, a restaurant dining room, or a train station.

Scenting has become a hallmark of luxury hospitality. Hotels are investing heavily in signature fragrances to attract and keep guests. Professional scent-marketing companies now supply custom fragrances to hotel brands and properties across the country. The plaintiffs’ bar has noticed. Here is what businesses need to know, and what to do now.

A National Campaign Led by One Firm

The current wave started in earnest in May and June 2026. That’s when the Oakland-based firm Cole & Van Note, founded by Scott Edward Cole, Esq., a notable class action attorney, filed a series of class actions over hotel fragrances on behalf of guests with fragrance sensitivities. The firm announced its first filing as “the first of its kind” and said more cases would follow. It called the case “a warning to all businesses pushing synthetic fragrance on their customers and employees.” Indeed, Scott was true to his word because more fragrance sensitivity class actions have been filed.

The firm’s website describes the effort as an “anti-fragrance litigation movement.” It says hotels are at the “[t]op of our list,” but that “ALL types of businesses are being addressed.” Major hotel chains have been named in the first round. The firm has also filed against luxury hospitality and restaurant brands, and it has moved beyond hotels into passenger rail.

The cases have been filed in federal courts in California and Florida, and the firm has continued to file against a broad range of hospitality and retail defendants. In the Florida case, local Florida attorneys appear alongside the lead firm. That arrangement lets the campaign spread into new jurisdictions quickly. The firm’s founder has said publicly that he expects more filings outside California in the coming months. After a recent visit to Las Vegas, he remarked that “[a]t least 95% of the places that I visited had some kind of fragrance.”

Many luxury operators use the same preeminent scent-marketing vendors. That means one vendor’s client list can work as a ready-made target list. Hotels, restaurants, airports, train stations, rail operators, casinos, spas, and flagship retailers that use ambient scenting should assume they are on plaintiffs’ radar. According to the leading fragrance distributor, in more than 20 years of business, these are the first such claims they have experienced.

What the Complaints Demand

The complaints follow a familiar template. They describe synthetic fragrance products, scent-dispersion machines, HVAC-integrated systems, diffusers and plug-ins. They cite statistics on asthma, chemical sensitivity and autism spectrum disorders. They seek nationwide classes of “[a]ll chemically sensitive (disabled) persons residing within the United States.”

The relief they request is aggressive consisting of:

  • brand-wide injunctions banning synthetic fragrance at every U.S. location and requiring scent systems to be decommissioned,
  • decommissioning of scent systems,
  • corrective advertising,
  • an accounting and constructive trust, and
  • attorneys’ fees.

Some complaints also reserve the right to add any party that controls “the environmental conditions” of a defendant’s locations. That language could reach scent vendors, property owners, and management companies.

In California, the complaints also invoke the Unruh Civil Rights Act alongside the ADA. That matters. A private ADA Title III claim allows only injunctive relief and attorneys’ fees, but Unruh provides statutory damages for each violation, which can multiply exposure across a class of guests.

How the Cases Are Unfolding, and What They Cost

Even when these cases go away, they do not necessarily stay away. Some of the early federal filings have been dropped, while others remain in their early stages. The firm has said that some dropped federal cases are being refiled in state court. A business that gets one case dismissed may simply face the same claims again somewhere else.

Even the earliest phases take time and money. In the passenger rail case, the first several months alone included all the following:

  • pro hac vice applications,
  • pretrial and discovery-procedure orders,
  • referral to a magistrate judge,
  • extensions of the response deadline,
  • disputes over scheduling conferences, and
  • a new complaint that changed which defendants were in the case.

If a case gets past the pleadings, a defendant faces costly fights over toxicology and indoor-air-quality experts, property-by-property inspections and class certification. It also faces reputational harm from public allegations that its premises are “toxic.” The complaints already invoke formaldehyde, phthalates and California’s Proposition 65. Industry observers advise businesses to check whether their insurance would even cover defense costs for claims like these.

Stay Ahead of the Next Complaint

Businesses that are growing and building new hotels, restaurants, stations, on trains and in terminals should treat fragrance as a compliance issue, not just a branding decision. Before a claim arrives, we recommend these steps:

  • Inventory your scent programs and vendor contracts, including the indemnity and insurance terms.
  • Adopt a clear, guest-facing fragrance statement that invites guests to raise concerns at any time and describes a case-by-case accommodation process.
  • Train front-line staff to recognize fragrance-related accommodation requests and escalate them to a designated contact who knows the scent program and the steps available to address a guest’s concerns.
  • Review your marketing language about air quality and the guest environment.
  • Build scent design into pre-opening accessibility review for new properties, stations and routes.
  • Put an early-response plan in place before a demand letter arrives.

If a demand letter or complaint arrives:

  • Take a deep breath, take it seriously, and do not ignore it.
  • Preserve all records about your scent program from its inception, including products, devices, locations and vendor communications.
  • Notify your insurer and your scent vendor promptly.
  • Call experienced ADA defense counsel before responding to plaintiffs’ counsel.

This article was orginally posted on Hotel Online: The Scent of Litigation: Fragrance-Based ADA Claims Are Coming for Hospitality and Travel. Is Your Business Ready?

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The hotel industry in 2026 operates in a market shaped by AI adoption, sustainability mandates, changing traveler behaviors, and significant economic headwinds. The competitive gap is not a question of whether the hotel company has invested in technology or has not; it’s whether technology has been leveraged into a guest-forward experience.

Vice Chair of the Firm’s Global Hospitality Group®, Bob Braun, shares his latest insights in Hotel Online. Read the full article, “What’s My Brand?”

 

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Articles were written by JMM’s Labor & Employment Department and are being shared on the Hotel Law Blog.

As 2026 approaches, California employers should prepare for another year of evolving employment laws and court decisions that will impact workplace policies and employee rights. Staying informed now can help minimize risk and ensure continued compliance.

The summaries below highlight key developments authored by JMM’s Labor & Employment attorneys to help you plan for the year ahead. If you have questions or need guidance on how these changes may affect your business, please contact a JMM attorney

Click the Read More links below each summary for additional details.

California’s 2026 Labor and Employment Law Updates – What Employers Need to Know

As we enter 2026, a new wave of labor and employment laws is set to reshape workplace requirements for California employers. From expanded paid family leave and new AI regulations to strengthened pay equity and whistleblower protections, these changes carry significant implications for businesses across the state. This client alert highlights the most impactful legislative updates. Stay ahead of the curve by understanding your obligations and taking proactive measures to ensure compliance.

Key developments covered:

AB 858: Rehiring and Retention of Displaced Workers
AB 692: Employment Contract Repayment Prohibition
SB 617: California Worker Adjustment and Retraining Act (WARN) Updates
SB 294: The Workplace Know Your Rights Act
SB 303: Bias Mitigation Training
SB 464: Strengthening Pay Data Reporting Requirements
SB 513: Personnel Records
SB 19: Criminalization of Threats of Mass Violence
SB 590: Paid Family Leave Expansion to Designated Persons
AB 406: Paid Sick Leave for Jury Duty and Victims of Violence
SB 642: Strengthening Pay Equity Laws
SB 648: Employee Gratuities
SB 261: DLSE Enforcement of Wage Judgments
AB 250: Revival of Statute of Limitations on Sexual Assault Claims
SB 477: Revisions to FEHA’s Enforcement Procedures
AB 1523: Court-Ordered Mediation

Read More

Key National Labor Relations Board (NLRB) Developments in 2025 and What to Look for in 2026 

On December 18, 2025, the Senate confirmed James Murphy and Scott Mayer to the National Labor Relations Board (NLRB) and Crystal Carey as the NLRB’s General Counsel. Murphy’s and Mayer’s confirmations will restore the NLRB’s quorum and give the Board a Republican majority that is likely to create employer-friendly precedent as they address the Board’s current backlog.

We have prepared a summary of some of the major Board developments from this year, as well as what to look for in 2026. 

Uncertainty and delay: With the NLRB lacking a quorum and facing staffing cuts, employers can expect increased delays in union elections, Unfair Labor Practice (ULP) processing, and Board rulings. The likely delays may result in prolonged bargaining limbo, deferred enforcement, and extended vulnerability for both employers and unions.

Shifting Landscape for Union Organizing and Representation: The reinstatement of the “blocking charge” rule and removal of the 45‑day challenge window to voluntary recognition may encourage more employers to challenge organizing efforts and could delay union representation determinations.

Read More

California’s New “Quit Fee” Ban: What Employers Need to Know About AB 692

Beginning January 1, 2026, California employers will enter a new legal landscape when it comes to training-repayment agreements, onboarding costs, and other contract terms that impose financial penalties when an employee leaves. Assembly Bill 692, now signed into law, effectively prohibits “quit fees” and most forms of repayment provisions tied to continued employment, declaring them unlawful restraints of trade.

If your business uses training-repayment agreements, signing bonuses with clawbacks, or employment contracts that impose fees when a worker resigns early, this law requires a careful second look.

Read More

SB 553 One Year Later: Key Lessons and Required Next Steps for Employers

It has been more than a year since SB 553 (California’s comprehensive workplace-violence prevention law) became mandatory for most California employers. Employers now enter the first cycle of annual review and retraining, and Cal/OSHA’s expectations are rising.

Before SB 553, workplace-violence policies were largely elective and inconsistent. Plans were often generic, rarely updated, and reactive rather than preventive. Over the past year, every California employer covered by SB 553 has been required to build and maintain a formal, site-specific Workplace Violence Prevention Plan , and to integrate it into day-to-day operations.

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California’s New AI and Automated-Decision Rules: Why Employers Should Act Now

Effective October 1, 2025, new California regulations make explicit what was already implicit: the Fair Employment and Housing Act (FEHA)’s anti-discrimination rules fully apply to “automated-decision systems” (ADS) used in employment. That includes not only sophisticated artificial intelligence (AI) tools, but any computational process that helps decide who gets hired, promoted, disciplined, or  otherwise receives an “employment benefit.”

Read More

SB 303: Ensuring Self-Awareness Isn’t Self-Incrimination

Effective January 1, 2026, SB 303 will add a section to the Government Code to address disclosures made during employer-sponsored “bias mitigation or bias elimination training, education, and activities” provided “for the purpose of educating employees on understanding, recognizing, or acknowledging the influence of conscious and unconscious thought processes and their associated impacts.”

Read More

Training Goes on File: SB 513 Expands Personnel File Requirements

California Labor Code section 1198.5 currently requires employers to maintain and make available to current and former employees personnel records “relating to the employee’s performance or to any grievance concerning the employee.” Effective January 1, 2026 the scope of employer obligations under section 1198.5 will expand.

Read More

AB 288: California’s New Labor Law Could Pull Private Employers Into State Oversight

California’s AB 288 creates a major potential shift in labor-relations enforcement. For the first time, the state’s Public Employment Relations Board (PERB), traditionally limited to public-sector labor disputes, would be able to hear certain private-sector representation petitions and ULP charges when the federal NLRB National Labor Relations Board  is delayed or unable to act.

Because the NLRB immediately sued California to block the law, its future is uncertain. But employers should prepare for the possibility of a dual enforcement system.

Read More

Notable Local Ordinances Taking Effect in 2026 

As employers prepare for 2026, it is increasingly important to monitor not only state-level employment law changes but also the wave of local ordinances emerging across California. With 58 counties and hundreds of cities, which include some of the largest and most heavily regulated jurisdictions in the country, California’s patchwork of local rules continues to expand, creating compliance obligations that can vary significantly depending on where employees perform work.

The article is a list of notable local ordinances taking effect in 2026

Read More

JMM’s Labor and Employment attorneys counsel businesses and management on workplace issues, helping to establish policies that address problems and reduce job-related lawsuits. We act quickly to resolve claims and aggressively defend our clients in all federal and state courts, before the Department of Labor, the NLRB, and other federal, state and local agencies, as well as in private arbitration forums. We represent employers in collective bargaining negotiations and arbitration. If you have questions or need guidance on how these changes may affect your business, please contact a JMBM attorney.

 

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LOS ANGELES, CA – December 3, 2025 – Jeffer Mangels Butler & Mitchell LLP (JMBM) recently helped guide the more than $500 million sale of two of San Francisco’s largest hotels from receivership. The Hilton San Francisco Union Square and Parc 55 San Francisco – A Hilton Hotel have been held in receivership since 2023, when the prior owner, Park Hotels, defaulted on a commercial-mortgage backed securities loan.

The court appointed a receiver to oversee these assets, with the receiver filing for court approval to sell the properties in August. Newbond Holdings and Conversant Capital completed the acquisition of the assets in November, which together represent 10 percent  of the city’s hotel inventory. The transaction is the largest hotel sale (by total dollars) in California in 2025.

David Sudeck, partner and Co-Chair of JMM’s Global Hospitality Group®, and JMBM partner Jeff Myers, represented the receiver in this matter.

About the Global Hospitality Group®

JMBM’s Global Hospitality Group® is the premier hospitality practice in a full-service law firm and the most experienced legal and advisory team in the industry. This team of seasoned hotel lawyers has helped clients with more than 4,700 hospitality properties located around the globe valued at more than $125 billion, providing one of the most extensive virtual databases of market terms for deals and financings.

About JMM

Jeffer Mangels & Mitchell LLP is a full-service law firm committed to achieving outstanding results for clients. With offices in Los Angeles, San Francisco, and Orange County, JMM serves clients worldwide across a broad range of transactional, litigation, and regulatory matters. For more information, visit www.jeffer.com.

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Previously posted as a JMBM press release on October 17, 2025.

Los Angeles, CA – October 17, 2025 – Jeffer Mangels Butler & Mitchell LLP (JMBM) recently represented Peachtree Group in the origination of the three-year, floating-rate, $55 million bridge loan with two 12-month extension options for Nimes Real Estate to recapitalize the Hotel Amarano Burbank-Hollywood.

David Sudeck, partner and co-chair of the Firm’s Global Hospitality Group®, led the JMBM team that included partner Brandon Chock. The Firm also represents Peachtree in connection with its multi-state C-PACE lending program.

The Global Hospitality Group® of JMBM is the premier hospitality practice in a full-service law firm and the most experienced legal and advisory team in the industry. Our team of seasoned hotel lawyers has helped clients with more than 4,700 hospitality properties located around the globe valued at more than $125 billion, providing one of the most extensive virtual data bases of market terms for deals and financings.

Nimes Real Estate acquired the 132-room Hotel Amarano in late 2019, before completing a multimillion-dollar renovation. Since its purchase, the hotel has faced challenges, including the pandemic in 2020 and the five-month Writers Guild of America strike in 2023. The recapitalization will enable the hotel to stabilize, thanks in part to its location in the middle of the Burbank Media District.

“There is already a ton of in-place demand that they draw from. It’s a very high-quality, renovated hotel, plus there is a lot of growth in the market, so they are well positioned to take advantage of that, “ Keegan Bisch, vice president of originations and credit at Peachtree, told Commercial Observer.

About JMBM’s Commercial Lending Practice

JMBM’s real estate and commercial finance lawyers represent foreign and domestic banks, opportunity funds, pension funds and other traditional and non-traditional lenders in structuring, negotiating and documenting financial transactions, including permanent real estate secured loans, construction loans, syndicated and participating loans, mixed-collateral and personal property secured loans, lines of credit, and the like.

About JMM

Jeffer Mangels & Mitchell LLP is a full-service law firm committed to providing clients with outstanding results. From our offices in Los Angeles, San Francisco, and Orange County, we serve our clients’ needs worldwide. For more information about our attorneys and our services, visit Jeffer.com.

About Peachtree Group

Peachtree Group is a vertically integrated investment management firm specializing in identifying and capitalizing on opportunities in dislocated markets, anchored by commercial real estate. Today, they manage billions in capital across acquisitions, development, and lending, augmented by services designed to protect, support, and grow their investments.

 

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8 October 2025

Click here for more insights on Outlook and Trends.

At The Lodging Conference in Phoenix, JMBM’s Global Hospitality Group® hosted an intimate meeting of hotel industry leaders to make valuable connections and explore ways to work together as they seek opportunities and confront the challenges ahead.

To kick off the meeting, Chantel Wu of STR CoStar provided a sobering update on the state of the industry and revised forecast for 2025 and 2026.

While the forecast has predicted some declines for many segments of the industry other than Luxury, the industry leaders focused on finding efficiencies, embracing innovation, and uncovering opportunities in uncertain times.

View the full presentation here: Hospitality Market Analytics 2025

 

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01 October 2025

Hotel Lawyers —  exciting new directions!

We just celebrated more than 30 years of Meet the Money®, where connections have bene made and deals have been done. It has been an invaluable event for the attorneys at JMBM and for so many of our friends in the hotel industry.

After much thought, we are going to transition Meet the Money® from its large conference format. It was a great program. It had its time. It had its place. But things have changed, and we need to move our efforts in new directions.

Where We’re Heading 

JMM’s Global Hospitality Group® will continue to be innovators at the forefront of hotel industry developments and to be a gateway to finance for our clients and friends. We anticipate that you will see our Meet the Money®, brand for smaller, more intimate, selective encounters to make better connections and foster meaningful relationships.

We’re exploring more curated meetings, in-person and virtual events at major investment conferences and at other times throughout the year.

We’d love to hear your thoughts on how to best work together in the future.

Stay tuned for more information!

 

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One of our favorite hotel conferences kicks off at the JW Marriott, Desert Ridge on October 6, 2025 in Phoenix. The Lodging Conference is expecting record attendance, and JMBM’s Global Hospitality Group® will be well represented.

Mark S. Adams, Guy Maisnik, David Sudeck, and Jim Butler will attend, joining other industry leaders to explore opportunities, make connections and do deals.

Don’t miss the panels where Mark Adams and David Sudeck will be speaking:

Tuesday, October 7th

  • Mark Adams: The Value of a Brand: Choosing the Right Flag or Going Independent — 11:15 am–12:15 pm
  • David Sudeck: Insights into Hotel Private Equity — 2:00–3:00 pm

If you’re attending, we look forward to seeing you there — be sure to stop and say hello!

 

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This was first published in IFLR on July 21, 2025. 

Summertime blues: corporate finance faces a financial reporting reckoning

By Marianne Martin and Bennett Young

Borrowers and lenders can plan ahead of the curve amid financial pressures

Summer is just at the half-way point, but financial reporting for many borrowers for second quarter is still around the corner. Given market volatility, tariffs and other financial burdens – initial indicators suggest that companies are likely straining if not flailing under the weight of economic conditions. What this means for borrowers and lenders is that second quarter reporting could be underwhelming, if not disastrous – putting multiple borrowers in default under their loans.

Below is a look at some of the key market indicators likely to be strained when second quarter reports are available, and what borrowers and lenders alike can do to avoid or reduce the damage.

  • EBITDA ills– The past few months have seen a topsy-turvy effect in the markets due to a number of factors. War, tariffs, inflation and now even immigration effects have put a tremendous strain on companies’ bottom lines, and we predict that earnings-based covenants, such as leverage tests hinged on EBITDA (or earnings before interest, taxes, depreciation and amortisation, a concept often defined differently per borrower) will be the first indicator that trouble is brewing. Even companies that have additional availability on their existing lines may find reduced EBITDA restricts their borrowing capacity and growth, and reductions in EBITDA can cause increases in interest margins in some credits.
  • Asset tests dip – Inventory strains, given logistical issues caused by tariffs and other disruptions, may harken concerns – but these same economic pressures are being felt by borrowers’ account debtors as well. This is likely to have a diminishing effect on the valuation and validity of accounts and other assets used in asset-based financial covenants (such as borrowing base measurements and loan to value, current ratio or liquidity/net worth covenants). The same impact will be felt more broadly in specific industries as certain asset classes, real estate as an example, continue to meander in their recovery – putting borrowers in a deficit from which they simply cannot recover.
  • Coverage tests shorten – Financial coverage tests (such as fixed-charge and interest coverage ratios), which reflect how far cash flow can cover costs, such as interest and other debt costs, are beginning to tighten for many companies. As overall business costs consume cash and thin out liquidity, a company’s ability to cover debt costs will be constrained. These cash flow strains are often viewed by lenders as a window to a company’s financial health – and a failure to maintain sufficient coverage can be seen as irreversible and fatal in the eyes of a lender, handicapping a borrower’s ability to get back to better health.

For lenders, there are steps that can be taken now to anticipate soft or poor upcoming financial results, and to be proactive with respect to any concerns. CONTINUE READING →

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