Anecdotally, transaction volumes are down due to the uncertainty surrounding the upcoming 23 June referendum on EU membership. Brexit specific provisions in loan agreements are not a feature of current transactions. However, the general consensus in the market is in particular circumstances provisions addressing associated risks with an 'out vote' have been creeping in, albeit with resistance.
While generally there is a requirement for Borrowers to compensate Lenders for increased capital costs during the life of a loan facility, some Lenders are moving to introduce 'flexit' clauses into loan documents, permitting them to increase the interest rate they charge in the event of a Brexit. Regardless of any view whether interest rates will in fact rise or not following an out vote, the underlying reason to introduce flexit provisions is primarily to address the risk of uncertainty and volatility in the market which is sensitive to political and economic events. Borrowers have not taken favourably to the introduction of any further rights of Lenders to reclaim costs. For instance, such flexit clauses sit in addition to other clauses, found in syndicated facility agreements that permit Lenders to increase interest rates if investor demand is weaker than expected.
A Brexit is generally unlikely to frustrate or affect the enforceability of English law-governed financing contracts. This includes currently executed agreements, the terms of few would specifically address a Brexit.
Material adverse effect (MAE) clauses, often differ between agreements and at a theoretical level could be invoked as a last resort when a Borrower's business suffered significant detriment as a result of a Brexit. However, it is highly unlikely a Brexit could constitute a MAE on a Borrower's business, performance of its obligations or enforceability of the underlying transaction documents. A Lender cannot usually invoke such a right when the circumstances surrounding the MAE were known to the parties at the time the transaction was entered into and the resulting risk of an 'out vote' in the referendum has been known for some time. (see: Grupo Hotelero Urvasco SA v Carey Added Value LS  EWHC 1039 (Comm)).
A Borrower currently negotiating a facility and who is concerned, may still opt to carve-out a Brexit from the definition of a MAE in the underlying facility.
A Brexit may change the market practice of UK banks. In previous times of political uncertainty, it has been relatively common to see Lenders introduce additional rights to be able to make amendments to the terms of existing agreements (e.g. Grexit, UK adopting the Euro). In this particular circumstance, a Borrower may seek to limit any right of the Lender (or Agent) to amend the agreement following a Brexit, to act reasonably, with consultation and limit amendments to those necessary to reflect market practice.
Following a Brexit, in the short-term the representations contained in facilities should not cause particular problems for Borrowers (or other Obligors) but they will need to review their loan agreements and ensure they will still be in a position to be able to make each representation post Brexit. This is particularly relevant for EU domiciled Borrowers/Obligors, who should seek local law advice for instance, on whether a representation that the transaction documents are enforceable in their local jurisdiction remains valid as the relationship between UK and EU laws will undergo significant change.
Any consideration to specific Brexit risks must be approached with caution, as any contractual provision inserted may inadvertently override the benefit of future legislation, not yet known, regulating a Brexit. For now, a concerned party may take a view on the likely volatility in the financial markets pre and post the EU referendum and whether a new transaction should be brought forward or postponed.
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