The LMA recently published a supplemental note on the implications of Brexit for LMA loan documentation. Its primary focus is the loss of financial services passports associated with Brexit. Here we zone in on the documentary tools the LMA recommends to address such concerns.
A brief recap
The UK has provided a limited period following departure from the EU during which EU27 institutions will be allowed to continue financial services in the UK and institutions which wish to permanently maintain their UK business will have the opportunity to apply for full authorisation from UK regulators. However, so far there has been no such provision from the EU. Instead, EU authorities have emphasised that it is up to the private sector to prepare for the consequences of the UK’s withdrawal from the EU. According to the LMA supplement, financial institutions need to consider the regulatory position applicable to their lending activities in that EU27 state (for UK institutions) or the UK (for EU27 institutions). The extent to which local authorisation is required will involve complex analysis and will depend on the relevant activity and the local law of each EU27 state.
Potential LMA mitigants
The LMA supplement flags some useful provisions in standard LMA loan documentation which may provide some contractual protection for institutions reliant on financial services passports and which are concerned about breaching local licencing agreements. These include: (i) the ability to transfer interests under facility documentation to an appropriately licensed affiliate; (ii) the ability for an institution to change the branch through which it acts and (iii) the ability to control the accession of additional members of the borrower group to existing lending arrangements. However each of these mitigants should be assessed on a case by case basis.
Other adjustments to the facility documentation
We expect there to be an increased focus in future on the different ways in which loans can be adjusted to address any future loss of passporting rights. The LMA supplement suggests that loan documentation might be tailored to address such concerns by adapting or including provisions such as the following:
- tranching structures can be used for multi-jurisdictional groups with different tranches available to different members of the borrowing group based on their location;
- fronting structures might provide for lending by a single “fronting” lender with back-to-back funding arrangements with the rest of the syndicate;
- illegality clauses may be amended to extend their application to those instances where a lender is unable to maintain its participation in a loan due to the loss of passport rights;
- facility agent resignation wording may be expanded;
- greater flexibility for bank accounts to be held with other appropriate institutions can be expected;
- more controls on the accession of new borrowers which complicate the regulatory picture the participating lenders may be introduced; and
- mandate and commitment letters might include mechanics which allow for a transfer of the commitment to an institution’s affiliate.
Please get in touch if we can assist you in considering any of the above.