As Brexit looms, Stuart Gillies highlights the top five clauses 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 with early.
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 yet.
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 payment obligations. Or The MAC clause is determined in the lender's 'reasonable opinion' and looks more broadly at the business operations, future...