The loss of passporting rights providing access to markets in the European Union is one potential consequence of the United Kingdom's Brexit decision, possibly resulting in restrictions in cross-border financing.
LMA facilities agreements already provide a transfer mechanism that enables UK lenders to transfer loan commitments to affiliates in EU jurisdictions without breaching local licensing requirements. However, where borrowers under a single facilities agreement reside in a number of different jurisdictions, short notice transfers under existing LMA provisions may still prove challenging.
The LMA recently produced a slot in Designated Entity clause. The Designated Entity clause provides a lender with the option of nominating an affiliate (referred to as a "Lending Affiliate") to participate in specified utilisations in place of that lender without a requirement for the lender to transfer any part of the available commitment to the Lending Affiliate. On signing, such an affiliate must become a party to the facilities, although there is a mechanism for nomination post-signing.
The new clause may be inserted into the LMA's leveraged and investment grade facilities agreements, and the LMA has also produced guidance on the clause's employment.
This added flexibility may assist lenders in complying with current or future licensing requirements without the lender having, at the beginning of a transaction, to consider the extent to which its lending commitment should be divided between locally licensed affiliates; or, at short notice, following a requested drawdown, needing to arrange a transfer of a portion of the relevant commitment to a locally licensed affiliate.
Where the nature of licensing issues is in flux, or the extent to which a borrower incorporated in a jurisdiction requiring local licensing might draw on a lender's commitment is not determined at the beginning of a transaction, this flexibility may prove to be very useful to lenders. Moreover, it may also assist lenders in dealing with borrowers from such jurisdictions.
The Designated Entity clause is not, however, a definitive answer to any potential difficulties arising from the impact of any loss of passporting arrangements as a result of the UK's planned withdrawal from the EU. Lenders will need to consider relevant local law, tax and regulatory issues that arise in connection with an EU affiliate lender joining the facilities agreement for the purposes of participating in a utilisation. It is to be expected that the administrative burden of the loan as well as costs may increase. Nevertheless, the new LMA Designated Entity clause may, in some circumstances, provide helpful flexibility for some institutions.