The first signs of spring remind us that EU Exit day is fast approaching but a deal between the EU and the UK is proving elusive. If passporting rights are lost what impact will that have on existing and new corporate loans made by UK lenders into Europe?
A number of EU jurisdictions are publishing legislation to alleviate some of the issues created by a loss of passporting rights, but the position is patchy and differs from state to state. What do those UK lenders that have not transferred their affected loan assets wholesale to a branch or affiliate located in a remaining EU Member State need to consider should the UK exit the EU without a deal?
The loss of passporting rights will undoubtedly affect both legacy loan agreements and new facilities to be advanced by UK lenders to borrowers in other EU Member States.
While it is expected that fully drawn term loans may be able to continue unaffected, a number of uncertainties remain around additional lending under existing agreements.
The continued operation of a revolving credit facility or the advance of a previously undrawn commitment, could, depending on the jurisdiction, be legally vulnerable or subject to repayment or restructuring.
The regulatory framework for lending in each EU Member State has always differed. Each Member State is responding in its own way to the potential loss suffered by UK lenders of passporting rights resulting in a patchwork of laws and ordinances of varying scope.
As a result, the position on permitted continued lending under legacy corporate loan agreements differs across Europe, ranging from an ability to continue to lend provided there are no further conditions precedent, to it being unlikely that any further advances can be made.
The advance of an uncommitted accordion facility, increase in the size of a facility or extension of the maturity of a facility also look likely to be off the table in all but a small number of jurisdictions if any lost passporting rights are not replaced with new legislation or permissions.
The normal administration of a loan, such as the grant of a waiver or consent, should not trigger a loss of the ability to continue to lend; however, more caution will be needed if amendments are made which could be considered material.
Caution may also need to be exercised when it comes to changes to either borrowers or lenders, particularly where this would involve a novation.
New lending will be heavily dependent on the temporary permissions and legislation that EU governments are currently scrambling to put in place to ensure that EU corporates continue to have access to funds from UK lenders.
France, Germany, Spain, Italy and Luxembourg, among others, have either published legislation or announced an intention to do so.
There are potential workarounds, again jurisdiction dependent, such as deep subordination of a loan or the use of a fronting bank structure.
Some UK lenders, and in particular the larger banks, have already put it place a more comprehensive solution in the form of a banking business transfer scheme under Part VII of the Financial Services and Markets Act 2000, but such schemes are not suitable for all.
As with almost everything to do with Brexit, the position changes almost daily, so organisations need to make sure they keep on top of developments.