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What is BRRD?

Bear with us, we’re going to talk European law for a moment… The EU Bank Recovery and Resolution Directive (2014/59) (BRRD) is the Directive that sets out an EU framework for recovery of financial institutions and investment firms.  In brief, it aims to put in place a framework including recovery tools to minimise financial risk should any of these institutions or firms hit crisis again. As you can imagine, it is complex so we are just going to take a peek at Article 55 BRRD and the chatter about recognition of bail-in clauses and see how, at a high level, that impacts documentation in UK deals.

What are recognition of Bail-in clauses?

Under Article 55(1) BRRD financial institutions and large investment firms (we’ll use the term “lender”) need to include a provision in their contracts that states that their liability under that contract could be subject to write down or conversion into equity under the powers set-out in BRRD.  What does that mean?

Any non EEA governed contract under which a lender has or may have liabilities needs to include a term recognising that those liabilities are subject to the rights of authorities under Article 55 BRRD. These rights include bail-in powers for authorities such as central banks to write-down lender debts and shares or to convert capital instruments or certain other liabilities into shares.

Recognition of bail-in clauses, that is, clauses that make clear these powers exist and are recognised, have to be included in any contracts governed by a non-EEA[1] law under which an EEA lender may have a liability.  This is what is meant by contractual recognition of bail-in.

EU member states were required to implement the bail-in requirements by 1 January 2016. It was implemented in the UK prior to this but, with debate on-going about the difficulty in implementing BRRD, changes have already been made to the UK regulatory requirements.

My deals are all UK governed so why does this matter to me?

Many followers of this blog will usually only deal with English law governed loan documentation and so may think this doesn’t apply to them.  However, there are certain liabilities that may appear in finance documents and other contracts governed by non-EEA laws where there is a cross-border non-EEA element to a transaction even if the primary documents are EEA (in our most common scenario English law) governed.

It is not uncommon for obligor groups to include a non-EEA entity. Perhaps a BVI or Delaware incorporated guarantor, or a Manx sister company to the borrower. These obligors will probably be granting guarantees and may also be granting security.  If assets are outside the UK, it is likely any security documents will be governed by local law.

Lenders will not usually have what many would think of as obligations under these security documents – surely the obligations are all on the obligor’s part?  The requirements apply to all liabilities though unless they are specifically excluded. So, as well as loan liabilities and indemnities or guarantees, even obligations where there is a potential liability, such as confidentiality provisions or an agreement not to unreasonably withhold consent could technically trigger the requirement for recognition of bail-in clauses.  The exclusions include eligible deposits from natural persons, micro-enterprises and SMEs, covered deposits, secured liabilities and some liabilities to employees.

So what do I need to do (or make sure my lawyers are doing)?

There are standard forms of bail-in clause available. Most notably, the LMA has published template provisions for contractual recognition of bail-in.   These are included in a fairly straightforward rider that links to a schedule that tailors requirements depending on the countries involved. The provisions can be added to the LMA form of loan agreement but can also be easily adapted for use in other finance documents.

We suggest that provisions be included in the loan agreement on any transaction where there are any non-EEA governed finance documents (or other contracts) and that foreign counsel be asked to include an equivalent provision in the security documents (or to include it by cross-reference).  Whilst the foreign documents could be combed through to see if they actually contain any potential lender liability, a more general approach may be to make this a requirement for any non-EEA governed security documents.

What about existing agreements?

The requirement for contractual recognition of bail-in clauses is not retrospective so we do not generally need to amend existing finance documents.  They do apply to all new liabilities however and so to all new finance documents. There are, however, some less obvious occasions when they may apply, for example:

  • where there is a transfer to a new EEA lender, this creates a new obligation for that lender and so the bail in clause would need to be included (provided, as always, there’s a non-EEA element);
  • where the documentation includes an agreement to future obligations, such as an accordion facility, the provisions will need to be included for when those obligations bite; and
  • any material amendments may result in new obligations so, if there’s a non-EEA element the bail-in provisions should ideally be added.

The market will take a while to settle down on this and there will no doubt be further changes as the requirements of different countries bed down.  In the meantime, a cautious approach seems to be the way forward.

For more information, email blogs@gateleyplc.com.

[1] For details of EEA countries click here: https://www.gov.uk/eu-eea

Link to BRRD: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014L0059

Bank of England: http://www.bankofengland.co.uk/pra/Pages/supervision/banking/recoveryresolution.aspx


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.