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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:
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.
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.
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.
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.
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
- Acting for Superglass Holdings Limited in restructuring its debt facilities with Clydesdale Bank plc involving a debt for equity conversion, additional equity by way of open offer and a regional assistance grant
- Acting for Lok 'n Store Group plc in respect of new £40m revolving credit facilities with The Royal Bank of Scotland plc
- Acting for Aberdeen Asset Management plc in connection with £100m revolving credit facilities provided by Barclays Bank plc and Lloyds Banking Group plc as a banking club
- Acting for DnB Nor Bank ASA in providing £13m debt funding for the acquisition by Reef Subsea of the subsea division of Rotech Group
- Acting for Optos plc in the US$17.5m acquisition of the ophthalmic division of US based OPKO Health partially from a newly arranged US$30m revolving credit facility from Lloyds Banking Group
Real Estate Investment Finance
- Acting for Aviva Commercial Finance Limited in providing £205m banking facilities to refinance a portfolio of properties owned by The Peel Group
- Acting for Aviva Commercial Finance Limited in providing £120m banking facilities to Longmartin Properties Limited (a joint venture between Shaftesbury plc and the Mercers' charity) secured over St Martin's Courtyard shopping complex in Covent Garden
- Acting for Friends First Managed Pension Fund Limited regarding a £26m refinance of a UK property portfolio with Santander Corporate Banking
- Acting for Santander in providing £25m investment facilities in respect of the acquisition of Crown House, Central London
- Acting for Blom Bank France SA regarding the £8m refinance of a central London residential development
- Acting for Aquamarine Power on the first marine energy debt funding to finalise the development of Oyster 2 wave power devices in Orkney
- Acting for Bank of Scotland plc in the restructuring, refinancing and ultimate redemption of a £50m property investment facility made available to London & Newcastle plc
- Acting for Santander Corporate Banking regarding the restructure and provision of £30m facilities for a central London residential development by a property developer in administration
- Acting for Friends First Managed Pension Fund Limited regarding the restructure of a £41m facility with the Royal Bank of Scotland plc for a UK portfolio
- Acting for The Combination of Rothes Distillers Limited on the banking aspects of its joint venture with Helius Energy plc in connection with a £50m renewable energy scheme comprising a whisky distillery by-product processing plant and a biomass combined heat and power plant
- Acting for Taff Housing Association regarding the £5m facilities made available by Barclays Bank
For further information, please contact your usual MMS contact, or:
020 7002 8554
020 7002 8548
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.