Readers will remember (6th April FinBrief posting) comments on MREL and Brexit by Elke König, Chair of the EU’s Single Resolution Board in April, that they might. As we said then, BRRD Article 45(5) states that where a liability is governed by a non-EU country’s law, “resolution authorities may require the institution to demonstrate that any decision of a resolution authority to write down or convert that liability would be effective under the law of that third country, having regard to the terms of the contract governing the liability, international agreements on the recognition of resolution proceedings and other relevant matters”, and standard bail-in wording (which Article 55 requires anyway) should satisfy this for new issues. However, as Bloomberg reported yesterday, it seems some EU27 issuers (it names Belfius Bank SA, Societe Generale SA and Novo Banco SA) have not taken any chances. It’s not uncommon to be able to amend the governing law as a “reserved matter” but these have gone further and dispensed with the need for noteholder consent. July’s Novo Banco prospectus‘s risk factors – too long to be quoted in full (but this link takes you straight to Page 49 of the prospectus for the relevant one) – include:

“If a … Capital Disqualification Event [defined on page 69 of the prospectus as the Notes failing to be Tier 2 Capital] occurs… the Issuer may (subject to certain conditions) at any time …vary the terms of the Notes so that they remain … Qualifying Tier 2 Securities, without the consent of the Noteholders”.

There is a “no less favourable” protection for noteholders “as reasonably determined by the Issuer in consultation with an independent investment bank or financial advisor of international standing”. The Brexit risk factor (on page 50) adds that post-Brexit:

“the BRRD as currently in force may require liabilities such as the Notes to include a provision in which their holders agree to be bound by any exercise of write-down or conversion powers by the resolution authority unless transitional provisions are introduced or such authority is satisfied that English law, or a binding agreement entered into by the United Kingdom, means that this is not required. Such a provision has indeed been included in the Notes”. However, it adds that “it is possible” that a CDE might arise if the Portuguese or any European resolution authority were not to accept its effectiveness or enforceability of such provision.

The risk factor caveats helpfully summarise the advantages of English law: “procedural and substantive provisions of such other law may be less favourable to creditors than, or otherwise significantly different from, English law. Furthermore, the courts may generally be less experienced, predictable, or efficient than the English courts”.

Query whether this cost Novo Banco money? Bloomberg quotes one asset manager: “English law bonds are considered to be superior from a litigation perspective because of the objectivity of the system… “Novo Banco probably ended up paying a higher price for that clause.”