The Eurozone Crisis and Loan Agreements

The financial crisis in the Eurozone shows no sign of easing, and is causing lenders to review their documentation for euro-denominated facilities.  There is as yet no market consensus on what changes are appropriate.  The Loan Market Association has advised that documentation should be reviewed, but has not yet changed its standard forms.  We remain of the view that the issues need to be looked at on a case by case basis holds good, but the following are among the main provisions to be reviewed:

(a) Governing law: a well drafted loan agreement will invariably contain an express choice of governing law.  The eurozone crisis may make it appropriate to choose a particular governing law for a document, but the usual choice of English law for the loan agreement is unlikely to be affected in most cases.

(b) Submission to jurisdiction: lenders in London are also likely to retain the usual submission in the loan agreement to the exclusive jurisdiction of the English courts (but allowing the lender to take proceedings elsewhere).

(c) Definition of currency: the lender should decide whether and how to define the euro: the LMA forms currently contain no definition.  A reference to the lawful currency from time to time of a particular state carries an obvious risk if that state leaves the euro.  A definition along the lines of "the currency of the participating member states" should be unaffected by one or two countries leaving the Eurozone.

(d) Payment mechanics: it should be made clear where payment is to be made and in what currency.  Lenders should consider whether the proposed place of payment is appropriate.  A place of payment outside a state considered at risk of leaving the Eurozone will generally be preferable. The LMA forms of loan agreement provide for euro payments to be made in a principal financial centre in a participating member state or in London with such bank as the facility agent specifies.

(e) Events of default: if appropriate, an express event of default could be included to apply if the borrower's country of incorporation leaves the eurozone.  A standard non-payment event of default coupled with a mechanics of payment clause will, however, usually require payment in a particular currency, and so be triggered if payment is offered in another currency.

(f) Market disruption: the standard provision deals mainly with the pricing of the loan if funds or quotes are unavailable in the London or the European interbank market.  Unless widened, it will not necessarily cover a change in currency. 

(g) Right to amend: in light of the previous point, it may be appropriate to include in a euro denominated loan a widely worded right for the lender to amend the loan agreement if there is a change of currency, either after consultation with, or with the agreement of, the borrower.

(h) Material adverse change: such a provision in the form commonly used may be triggered if a change of currency adversely affects the financial condition of the borrower, but lenders have traditionally been cautious about relying on such clauses as a default and would wish to avoid ambiguity.

(i) Security: given that the currency of a state leaving the eurozone may depreciate rapidly, there is a risk from currency fluctuations where collateral is denominated in a different currency from the secured obligations.  A provision requiring top-ups if the value of the collateral falls against the base currency of the facility may be appropriate – and will often already be included.