So what does Brexit mean for the future of the UK loan market? In its recent note, “Documentary Implications of Brexit for LMA Facility Documentation“, the Loan Market Association (LMA) has usefully outlined the key provisions of its loan documentation likely to be impacted.
Few immediate changes
It may come as some comfort that the LMA believes that there is no need to make significant immediate contractual changes, although a few tweaks may be advisable on a transactional basis. It is only when the UK’s exit negotiations are concluded and the dust settles on new agreements that we can expect to see more detailed documentary changes.
The LMA points out that references to the European Union and to EU legislation might need to be tweaked on a transactional basis. The LMA is reviewing these in conjunction with relevant working parties, however when drafting documentation it is worth bearing in mind. For example, where there is reference to a transaction or acquisition being permitted if the target is an EU entity, drafters may want to consider extending that to UK entities post-Brexit if the agreement is expected to last beyond likely Brexit.
Another important change flagged is the potential loss of EU passporting and how this will impact on documentation. The principle allows UK banks to lend into other EU jurisdictions without the need for licences that may otherwise be required, by virtue of them being a regulated entity within the UK. Whilst appropriate transitional arrangements could be put into place to ensure that the concept survives UK exit, it is not known what will actually be negotiated.
To address the potential loss of passporting, the LMA is producing an optional “designated entity” clause, which allows for the lender to lend out of an affiliate in another jurisdiction. In the past, these have been used on some cross-border transactions to address jurisdictional issues but they are expected to become increasingly common despite causing operational difficulties at times. The LMA is currently preparing a template designated entity clause.
After UK exit negotiations conclude – what could stay the same?
Despite the mounting expectation of change, the LMA highlighted that certain aspects will remain the same. English law will continue to be used as the governing law for facility documentation, as EU member states will continue to give effect to English law in the same way as they do currently.
However, as it is not known to what extent a judgement in an English court will be enforceable in other EU states, it will be interesting to see what’s agreed as part of Brexit negotiations in this regard. In the meantime, given the flexibility the existing dispute resolution clauses give to lenders and the uncertainty surrounding them, the LMA isn’t proposing any changes at this stage.
After UK exit negotiations conclude – what could change?
The LMA also noted that the UK withdrawal could result in an Article 55 requirement for bail-in clauses to be included in English law contracts. At the moment, the clauses are required in any non-EEA governed contract under which a lender has or may have liabilities. The position will only be known once the UK’s cessation from the EU has concluded or, at least, once negotiations reach a stage where there is a certain level of certainty regarding what is to be agreed.
It remains clear from LMA guidance that until negotiations have concluded, there will be few documentary changes made to their recommended forms of loan agreement, although lenders will likely consider their own preferred approach to the various issues. It may be that as matters progress, more certainty develops over particular issues and that the LMA will address this at such time. In the meantime, we are mainly in a position of wait-and-see.
A copy of the LMA’s full note is available to members on the LMA website.
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