Lenders grappling with the impact of Brexit loans

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LONDON (Reuters) – The effects of Brexit are starting to be felt in the syndicated loan market as lenders seek greater flexibility on where and how they book loans to deal with the potential loss of passport rights in a Hard Brexit, a move that could cause operational problems for the agency functions of banks.

A British Union flag flies in front of an EU flag during a pro-EU referendum in Parliament Square in London, Britain on June 19, 2016. REUTERS / Neil Hall / File Photo

Credit bankers are also grappling with the full range of issues affecting broader capital markets, from applicable law to jurisdiction and enforcement, how existing and new agreements are interpreted, section 55 BRRD and withholding tax.

The potential loss of passport rights, however, is the most serious problem facing lenders. Business loans are an unregulated product in the UK and Ireland, but work in some EU countries including France, Italy and sometimes Germany.

“Where the banks focus their legal concerns the most is in France, Italy and possibly Germany,” said Simon Fisher, Mayer Brown’s banking and financial practice partner.

British and Irish banks may not be able to finance or participate in certain loans if they do not have licenses or local regulations recognized by a European passport allowing them to make loans and take collateral.

This is a big problem for cross-border loans, as large blue-chip European companies, such as Swiss food and drink company Nestlé, often have multi-billion euro loans that can be used. by several subsidiaries in the different countries in which they operate, which can draw on and repay the loans to the parent company.

At least one global investment bank, which has provided loans through its UK entity, is considering no longer booking loans through its UK booking platform and booking through single market entities, sources said.

“This institution says it plans to remove the English entity from the selection of booking entities. Loans are currently booked through the UK entity, but it looks like the writing is on the wall and it could stop, ”a senior source said.

The loss of English reservation centers, however, should not diminish the importance of English law to the loan product or of the English courts to hear disputes.

“Just because the booking hub is not in England doesn’t mean that it diminishes the importance of English law for product financing?” or the English courts to hear disputes, ”said Alex Dell, partner and co-head of asset lending at Mayer Brown.

The Loan Market Association, which represents EU lenders, including UK banks, has raised awareness among the UK government, including the Treasury and FCA, and the EU about licensing requirements and the importance of loan market and its operations in the EU.

DESIGNATED ENTITY

The Loan Market Association has come up with a solution that reassures lenders doing business under its documentation and under English law, saving time until the outcome of the complex Brexit negotiations is known, this will prevent cross-border loans from being modified or structured to take into account any possible changes as a result of license agreements at this time.

The LMA introduced a new Designated Entity Clause which is designed to “fit” into existing documentation of investment grade or leveraged loans that allows banks to designate designated entities or affiliates that meet requirements. regulatory requirements for registering assets and granting loans.

“I have yet to see any real transactions or live transactions structured specifically on the basis that the UK could lose its passport license,” Dell said.

DEC gives lenders more flexibility to change where loans are held in an evolving regulatory system. The commitments will be made by a central lender, who can appoint an affiliate – for example a French affiliate to lend to a French borrower.

The clause will make it easier for lenders to determine or assign loan obligations to entities in its group without having to make a formal transfer and rather functions as an informal sub-participation.

This has important implications for bank capital and the way subsidiaries are capitalized, and lenders will change their loan arrangements. Banks can book business through parts of the bank that have not had large flows before and will need adequate capital to support their lending activities.

“This will make it easier for lenders to determine or assign loan obligations to its group entities at a later date without having to make a formal transfer and has the advantage of allowing banks to better manage their exposure in different jurisdictions. “said Fisher.

The Lender Affiliate will take over the specified loan obligations and rights, while the Central Lender will retain the Undertaking and all other obligations and rights, including remaining responsible for communications and voting.

“It’s useful if you’re a large bank and you have more than one entity with a passport, less if you don’t,” Dell said.

While DEC gives lenders additional flexibility, the added layer of complexity with subsidiaries could cause significant operational issues, especially for the agent banks administering the loans, which is likely to be costly and time consuming. , multiple sources said.

Several issues still need to be addressed, including how refunds work under the affiliate structure – whether refunds go to the affiliate or central lenders – and whether or not there will be a limit on the number of affiliates. .

Banks will also need to do a “know your customer” job, which identifies and verifies customers, on loan affiliates. This will create additional work for agent banks, which must monitor all lending entities and could also affect secondary trade by delaying the close of transfers.

Editing by Christopher Mangam


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