The precise impact of Brexit on financing transactions still remains unclear at this stage. The principal issues in focus arise in connection with (i) market volatility; (ii) the effects on English contract law and dispute resolution more generally (which are relatively few); and (iii) the impact of relevant EU law and its expected UK replacement under the Great Repeal Bill (whether that EU law is directly effective or implemented via UK legislation).
The impact of any market volatility appears to remain one of the main concerns for borrowers and lenders, in particular in relation to foreign exchange volatility where borrowers have non-sterling exposure. This is particularly relevant where financial covenants are calculated partly based on a spot rate of exchange at a particular date and partly on an averaged rate over an accounting period. Where non-sterling debt obligations are hedged, counterparties may be required by their derivatives contracts to post further collateral, and if a position is closed out, there may be significant payment obligations if the contracts are out of the money.
The ability of lenders or other financial counterparties to invoke a contractual material adverse change clause would, as ever, depend on the precise wording of the relevant clause and the formulation of “MAC” clauses is likely to be kept under review for new financing arrangements. However the high evidential burden required to prove that a material adverse change has been triggered should be borne in mind.
In the longer term, the impact on loan documentation governed by English law is likely to be relatively minor (see the section on Contract and other obligations). While arbitration with a seat in London should not be affected by the exit from the EU, there is some focus on dispute resolution mechanisms, specifically on the question of enforcement of judgments, following an exit from the EU. This is discussed in more detail in the Disputes section but, in brief, it is likely that the UK would seek to reach an agreement with the EU on reciprocal jurisdiction and enforcement of judgments to replace the existing EU legislation on these matters and may join the Hague Convention on Choice of Court as an independent signatory. This would protect the recognition of exclusive jurisdiction clauses and related judgments as the EU Member States are all parties to this Convention already. It is worth noting that in the absence of any agreement with the EU, parties to transactions involving a submission to the English courts would be in the same position as regards recognition in the EU as they would be if they were party to New York law documents containing a submission to the New York courts.
In terms of the detail of financing agreements, any contractual reference to the EU would need to be considered, and possibly amended to clarify the position following a UK exit. The wider effects of the UK potentially being a third country as far as the Bank Recovery and Resolution Directive is concerned should also be considered, primarily in the context of whether contractual bail-in language should be included in English law contracts to which an EU financial institution is a party.
There should be no effect on English law security over assets located in the UK or English law guarantees. However, the position may be more complicated where assets or rights to be secured arise as a result of, or are very closely entwined with, EU law. For example certain intellectual property rights arise under EU law (for further details see the Intellectual Property section), and security over those rights is perfected by registration at an EU level.
The Financial Collateral Regulations (which stem from the EU Financial Collateral Directive) are now fairly well entrenched in domestic law in the UK, and we expect that the UK will wish to retain a similar regime following an exit from the EU, given their importance in finance transactions generally.
There may be a myriad of regulatory issues to consider since the regulatory position following a UK exit is still unclear. These are discussed in more detail in the Financial Services section. The principal issue will be in relation to potential loss of passporting for lending or the provision of other financial services in jurisdictions where licences to provide such services are required: financial counterparties will want to consider any illegality or other provision which may be triggered and may wish to amend the documentation to allow for affiliate entities which meet the relevant regulatory requirements to actually provide the service, or in the absence of any contractual ability to do so, may approach counterparties to seek transfers or novations.