As Brexit looms,Stuart
Gillieshighlights the top fiveclauses
to consider when reviewing loan documentation.
At the recent Conservative Party Conference, Prime Minister
Theresa May confirmed that Article 50 will be triggered in the
first quarter of 2017, which will begin the two year exit process
for Britain leaving the EU.
The impact of Brexit on financial transactions is yet to be
fully determined, although it is unlikely to have a significant or
immediate legal impact on current or future loan documentation. As
a precaution however, we would still recommend that you review
outstanding loan documentation and an open dialogue is maintained
between parties to ensure any potential risks are caught and dealt
1. Be aware of increased costs
Whatever route Brexit discussions take, they will undoubtedly
result in the introduction of new laws and regulations which could
potentially lead to lenders incurring increased costs. Lenders may
look to recover these extra costs under the increased costs
provisions in their facility agreements. LMA standard form
documentation provides that borrowers compensate lenders for
increased capital costs and the Basel Committee's globally
recommended standards for bank capital and liquidity related
legislation is often referenced. It is likely that equivalent
legislation would be enacted following Brexit and so we do not
anticipate lenders incurring increased costs. Some lenders are
looking to introduce 'flexit' clauses into facility
documentation which provide for increasing interest rates in the
event of Brexit but this is not something we have come across as
2. Look out for events of default
Brexit specific or related events of default provisions are rare
but if this is something that has been provided for, any such
provisions should be reviewed carefully. Frequently found in LMA
style facility agreements are 'material adverse change'
(MAC) events of default. The effects of Brexit in the short term at
least, specifically the uncertainties that surround it, such as
currency fluctuations on non-hedged transactions, could constitute
a MAC event of default. This will depend on the specific drafting
of the clause, which normally takes one of two forms (or a
combination of both):
The MAC clause is objectively
determined and focuses on the borrower and their ability to meet
The MAC clause is determined in the
lender's 'reasonable opinion' and looks more broadly at
the business operations, future prospects etc.
MAC events of default usually take the first form and are
specific to the borrower and not the wider political and economic
landscape. Having said that, facility documentation can often
include drafting which provides for an event or series of events
which in the lenders opinion, could constitute a MAC.
3. Consider Financial Covenants and Non Payment
It is wholly possible that Brexit could be the catalyst of
financial losses to businesses. This could result in breaches of
financial covenants or in a non-payment which would trigger an
event of default. These should be looked at carefully and be the
subject of open dialogue between parties.
4. Be conscious of Representations and Undertakings
Representations relating to a borrower's authorisation to
transact should be carefully reviewed as breach of such
representations would be treated as an event of default. If a
company's business is particularly dependent on EU legislation
and access to the Single Market, Brexit could be considered a MAC
and lead to an event of default. A borrower may wish to address
these risks by making changes to its business operations. The
problem is that such actions could be restricted by the wording of
any loan documentation. For example, a facility agreement may
restrict (by way of a repeating representation) a borrower from
changing its 'centre of main interests' (derived from
European Insolvency Regulation) away from its jurisdiction of
5. Highlight any references to EU
Standard form LMA documentation is unlikely to contain many
provisions which rely, directly or indirectly, on EU legislation.
Reference is often made to 'a provision of law is a reference
to that provision as amended or re-enacted' which would cover
any replacement legislation. Also, any reference to the European
Union in the definition of Participating Member State only applies
to any EU member state which has adopted the euro as its currency
so is not affected by Brexit. However, the specific drafting should
of course be checked.
The material contained in this article is of the nature of
general comment only and does not give advice on any particular
matter. Recipients should not act on the basis of the information
in this e-update without taking appropriate professional advice
upon their own particular circumstances.
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