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The Eurozone Crisis and Loan Agreements

The ongoing financial crisis in the Eurozone is causing lenders to consider the impact, on loan documentation, of a Eurozone member departing from the currency union.

The Loan Market Association has advised that documentation should be reviewed, but has not yet published guidance or updates. Clearly any potential issues need to be looked at on a case by case basis and in light of the particular circumstances surrounding a potential departure of a specific state. That said, there is consensus forming among law firms as to what provisions which should be focussed on in both existing and new loan documentation. These can be summarised as follows:

Jurisdiction
Where the jurisdiction submission provision allows the courts of a departing state to have jurisdiction then the departing state's courts would inevitably give effect to the relevant domestic redenomination legislation. The result of which may be that the borrower is able to pay in the new currency rather than Euro. Assuming that the state abandoning the Euro remains in the EU, the Brussels I Regulation would require English courts to enforce a judgement of the departing state's courts unless to do so would be "manifestly contrary" to English public policy. This is unlikely to be the case where the redenomination legislation did not breach any EU Treaties.

Governing Law
The usual choice of English law for the loan agreement is unlikely to be affected in the majority of cases, subject to the above. The choice of a departing state's law would have obvious implications.

Currency Definition
A definition along the lines of the lawful currency from time to time of a particular state carries an obvious risk if that state deserts the Euro. A reference to the currency of the participating member states should be unaffected by one or two members' exodus from the Eurozone.

Mechanics of Payment
It should be clear where payment is to be made and in what currency. A place of payment outside a state considered at risk of leaving the Eurozone (or out with the Eurozone in the first place) will usually be preferable.

Events of Default
The standard material adverse change provisions may be triggered where a change of currency affects the financial condition of the borrower but lenders are generally reluctant to rely solely on this clause to trigger a default. The usual market disruption clause deals mainly with the pricing of the loan if quotes or funds are unavailable and unless widened it will not obviously cover a currency change. For the avoidance of doubt, it may therefore be appropriate to include a straightforward event of default if the borrower's country of incorporation leaves the Eurozone.

Right to Amend
It may be prudent to include a right for lenders to amend the loan agreement if there is a change of currency, either after consultation with or, with the consensus of the borrower.

Security
Where the secured obligations are not in the same currency as the underlying loan there is a risk from currency depreciations. A provision requiring top-ups if the value of the collateral falls below the loan amount would be sensible and may already be included.

Supporting Documentation
Potential cross defaults or defaults under related credit support documentation such as guarantees, security, ancillary facilities, hedges or insurance should also be considered.

Should you require further information or if you have a specific query on this topic please contact Suzi Low or Cara Norfolk.

Transfer of Debt - Just Say No?

The recent High Court case of Porton Capital Technology Funds and others v 3M UK Holdings Ltd and another offers guidance on the practical application of the principles to be applied in determining whether or not a party to a commercial agreement has acted reasonably in refusing an application for consent where the agreement requires that such consent should not be unreasonably withheld.

The High Court has held that the party requesting consent must show that the other party's refusal is unreasonable, which is a question of fact. The refusing party is not obliged to show that its refusal is right, simply that it was reasonable. It is not required to balance its own interests with those of the other party, unless the balance is completely disproportionate.

There are no reported cases providing direct guidance as to when a borrower's refusal of consent to an assignment or transfer of debt is reasonable. Although not in the context of a transfer of debt, this case provides useful guidance on the subject.

The question of reasonableness will be one of fact to be decided by the court objectively in each individual circumstance. It is likely that different considerations will apply including:

• the transferee's credit rating (particularly if the commitment being transferred is undrawn at the time)
  
  
• the transferee's tax residency (which is relevant to possible tax gross up implications although there is usually an obligation on lenders to mitigate this impact)
  
  
• whether the transfer would put the transferee in a controlling position (whether positive or negative control) with regard to majority voting in a syndicate
  
  
• the borrower's financial position (particularly if the transfer is taking place in the context of a restructuring)
  
  
• the identity and type of the transferee entity

It is worth noting that some loan agreements will, in any case, limit the circumstances in which a borrower's consent to transfer is required. Even if consent is required, contractual exceptions will often apply if the proposed transfer is to an affiliate of the existing lender or if an event of default is continuing.

For more information please contact Suzi Low or Roisin Forde.

Rayford Homes: Fixing Banks' Security

The High Court has determined that a fixed charge over real property acquired after the date of entry into security will take effect as a fixed and not a floating charge (Rayford Homes Limited v Bank of Scotland plc (2011)). This will be welcome news for lenders in the real estate arena, as it confirms that they will have priority, in an insolvency scenario, over distributions from the sale of properties acquired during the course of the borrower's business.

A fixed charge is one that immediately attaches to a particular asset which is capable of being ascertained and definite. Fixed charge holders must have of control over the particular asset. By contrast, a floating charge is over a class of assets which changes from time to time during the course of business of the borrower. Assets subject to floating charges may be sold without the prior consent of the charge holder.

Notwithstanding the contention of Rayford Homes that future acquired property was not capable of being ascertained and definite, the court disagreed. This conclusion was made on the basis that the terms of the debenture required that the fixed charge contained therein was registered on future acquired property. Therefore, lender consent would be necessary to the subsequent sale of such property. Accordingly, the lender retained control and the security was of a fixed and not a floating nature.

For more information please contact Helen Fysh.

Recent MMS Transactions

PLC/Major Corporates

Acquisition Finance

Real Estate Investment Finance

Project Finance/Renewables

Insolvency/Restructuring

Housing Finance

Contact Us

For further information, please contact your usual MMS contact, or:

Chris Vause
Partner
020 7002 8554
chris.vause@mms.co.uk

Colin Harley
Partner
020 7002 8548
colin.harley@mms.co.uk

Click here to view contact details for other members of our Banking & Finance team.

This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.