Sovereign default, bank default,
eurozone exit and related issues:
is your business prepared?
A Practical Guide to Contingency Planning and
Legal Risk Management
slaughter and may
July 2012
Contents
Introduction01
1. Approach to contingency planning
03
1.1 Contingency planning step-by-step
03
1.2 Contingency plans in action
08
2. Euro exit/break-up
11
2.1 Impact on contracts
11
2.2 Redenomination 12
2.3 Capital and exchange controls
16
2.4Key risk indicators 20
2.5Performance/Enforcement
21
2.6 Sample due diligence checklist
24
3. Risk mitigation
25
3.1 Approach to risk mitigation
25
3.2 Choice of law and jurisdiction
25
3.3Redenomination risk
26
3.4Performance/enforcement
28
3.5 What is happening in practice?
30
3.6What is happening in practice – financing arrangements
31
3.7 What is happening in practice – financial reports
34
3.8What is happening in practice – prospectus risk factors
36
4. Impact on financing
37
4.1 Conditions in the loan market
37
4.2 Impact on existing loan facilities
38
4.3Refinancing options
39
4.4Loan terms for new facilities
41
4.5Non-bank lending
43
4.6Checklist for corporate treasurers
44
5. Impact on M&A 45
5.1Opportunities
45
5.2 Due diligence
45
5.3 Completion risk
47
5.4Valuation risk
47
6. Concluding remarks
49
Appendix – Sample legal due diligence checklist
50
Further Information
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A Practical Guide to Contingency Planning and Legal Risk Management
Introduction
The continuing lack of clarity in terms of outcome (or the possible range of outcomes) of the eurozone crisis is a
barrier to the failsafe management of particular risks. However, the various issues which are perceived as the main
potential risk areas can be reasonably well identified in broad terms, comprising sovereign default, bank default and
the possibility of euro exit or break-up and the imposition of exchange and capital controls.
The mechanics and implications of these possibilities, in particular perhaps, euro exit, were not widely understood
prior to the onset of this crisis. The importance of ensuring that management and key operational staff have an
overview of these complex topics and the issues to which they could give rise, in case swift decisions concerning
their impact are required in the future, is now reasonably well recognised. Many businesses have embarked on at
least some level of contingency planning in these areas, in the interests of being ready to take action should the
situation deteriorate further.
It is becoming increasingly clear that any contingency planning exercise should address all aspects of the crisis,
including both the headline risks identified above and, perhaps more importantly, secondary or “contagion” risks.
For example, whatever your view of the likelihood and impact of Greece leaving the euro (and whether or not it
happens), the fact that the risk exists and, according to a number of commentators, is becoming more likely, suggests
the prospect of continuing uncertainty in the financial markets and continuing recession in countries both inside and
outside the EU.
The possibility that the economic situation in the eurozone may either not improve for some time or take a turn for
the worse and, more specifically, the potential impact of a contraction in the availability of finance, are important
considerations, whether or not any of the main identified contingencies materialise. Eurozone crisis contingency
plans must be sufficiently broad-ranging to ensure that the business is equipped as far as possible (and practical) to
withstand and manage a deterioration in economic, funding and trading conditions, whether or not coupled with
specific external events such as sovereign default, bank default and eurozone exit. For businesses that have already
taken these steps, it is important to ensure that the situation is regularly monitored.
Scope of this memorandum
This memorandum consolidates, updates and builds on our previous briefings on the legal aspects of eurozone crisis
contingency planning (listed for reference at the end of this memorandum) and is structured as follows:
•
Part 1: Approach to contingency planning contains a step-by-step indicative approach to contingency
planning and an overview of the variety of scenarios and outcomes that might be considered. It also considers
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A Practical Guide to Contingency Planning and Legal Risk Management
the nature of the “Day 1” decisions a management team might face when called on to implement contingency
plans, to illustrate how advance planning might facilitate that process.
•
Part 2: Euro exit/break-up outlines the manner in which contractual obligations are likely to be directly
affected by a fragmentation or break-up of the euro and the types of contract that are most likely to be
disrupted as a result.
(The Appendix contains a sample legal due diligence checklist, based on the risk factors highlighted in Part 2,
which general counsel and other in-house lawyers may find helpful for the purpose of identifying contracts
which might be considered as at material risk of being disrupted in a euro exit or euro break-up scenario.)
•
Part 3: Risk mitigation suggests some practical measures that might be taken in appropriate circumstances to
(i) mitigate the risks highlighted in Part 2, and/or (ii) ensure that the business is prepared to deal with specific
contingencies as (and if) they happen. It also includes some observations with regard to the extent to which
such measures are being adopted in practice.
•
Part 4: Impact on financing considers the effects of the crisis on the terms and the availability of corporate
debt financing and suggests some possibilities that corporate treasurers might wish to bear in mind in
anticipation of a contraction in liquidity.
•
Part 5: Impact on M&A outlines the potential implications of the crisis on M&A transactions and some of the
issues that sellers and purchasers might wish to think about in the current environment.
Non-legal aspects
This memorandum is primarily focused on the legal aspects of due diligence and contingency planning, which will
inform, and will need to be undertaken in conjunction with, a broader review of the financial, commercial and
operational impact of the various ways in which the ongoing difficulties in the eurozone might develop.
We would refer you to the helpful guidance on eurozone contingency planning available on the Association of
Corporate Treasurers’ website1 for further information on non-legal aspects.
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02
http://www.treasurers.org/contingencyplanning/euro
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A Practical Guide to Contingency Planning and Legal Risk Management
1. Approach to contingency planning
1.1 Contingency planning step-by-step
The scope and content of a eurozone crisis contingency planning exercise must be proportionate to the level of risk
and therefore depends on the business in question. For some businesses (for example, those with no operations in
and minimal exposure to eurozone counterparties), the contingency planning process may be limited to education
and monitoring. For others, a more extensive process might be justified (or indeed in the case of regulated entities,
required by regulators).
Any due diligence that is undertaken should focus on material risks and pressure points. With that in mind, an
indicative approach to contingency planning might involve the steps described below.
Step 1
Allocation of responsibility
Step 2
Initial impact assessment
Step 3
Consider further due diligence
Step 4
Prepare for due diligence
Step 5
Due diligence
Step 6
Risk mitigation
Step 7
Look forward
Step 8
Monitor
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Step 1 – Allocation of responsibility
Responsibility for monitoring the development of the crisis and assessing the impact on the business must be
allocated. This may involve the establishment of an internal eurozone committee or task force.
The remit of such a committee or task force will need to be agreed. Its functions may include, for example,
responsibility for monitoring political and economic developments, the identification of the group’s material
exposures and/or interests in the eurozone and the design and implementation of the group’s contingency plan
(see further below). It may also be prudent to add the potential impact of the crisis and contingency planning
to the rolling agenda for board and key management meetings and to establish a process for keeping audit and
governance committees informed of developments.
Step 2 – Initial impact assessment
The outcome of a high level preliminary assessment of the extent of the group’s operations in the eurozone, and its
exposure to counterparties located (or whose assets are located) in the eurozone, will determine whether a more
detailed due diligence review is required and, if so, what the scope of that review should be.
The initial impact assessment should be undertaken on an entity by entity basis for groups and will involve an
analysis of the group’s structure (by reference to an up to date group structure chart) and a consideration of:
•
Country risk: whether the group has subsidiaries and/or joint venture arrangements in the eurozone or in the
weaker eurozone member states (“EMSs”) and if so, the nature of their operations in those countries.
•
Counterparty risk: whether the group has material trading, financing or other exposure to counterparties
located in or exposed to the eurozone or the weaker EMSs.
In addition to the need to assess counterparty risk on a geographic basis, it may be relevant to consider the extent
of the group’s exposure to particular types of counterparty, namely, eurozone sovereign entities and financial
institutions which are either located in, or particularly exposed to, the weaker EMSs.
For example, if the group has investments in the government or bank debt of the higher risk jurisdictions,
contingency planning should take account of the likelihood of the debt being written down or made unenforceable
by operation of law. A detailed consideration of this topic is outside the scope of this memorandum, but the key
reasons for reviewing the extent of such exposures from a legal perspective are as follows:
•
04
Government debt issued under the law of an “at risk” EMS will be more susceptible to write-down and/or the
introduction of collective action clauses. English law governed government debt (e.g. the new bonds issued by
Greece) is more difficult to restructure as negotiations with bondholders are likely to be required. In addition,
the terms and effect of any waiver of sovereign immunity may influence the enforceability of a contract with a
sovereign entity.
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A Practical Guide to Contingency Planning and Legal Risk Management
•
It is possible that the government of a vulnerable EMS could pass legislation or use existing legislation to write
down bank debt (e.g. bonds/notes issued by its banks) or “switch off” events of default/termination events. The
EU Credit Institutions Winding-up Directive2 (“CIWUD”) could also potentially be used to amend the terms of
foreign law governed bank debt or to “switch off” events of default/termination events. CIWUD requires such
measures to be recognised in other EEA countries (including the UK).
However, for most non-financial corporates, the main potential impact of sovereigns in financial difficulty is likely
to be indirect. An important concern for many will be the extent to which the sovereign debt crisis in certain
countries affects the banking sector, and therefore the availability and price of credit going forward. This is
discussed in Part 4.
Step 3 – Consider further due diligence (if any)
If the group’s exposure to the eurozone is sufficiently material, the next step is to outline the factual scenarios and
outcomes of concern to the group which are to form the basis of a more detailed due diligence exercise.
It is likely to be helpful as a first step to break down and summarise the scenarios to be considered and the risks
which might potentially be examined.
Eurozone outcomes
Euro survives
Euro exit
Euro break-up
Further sovereign bailout/
restructuring
Redenomination/currency risk
Further bank recapitalisation/
restructuring
Exchange and capital controls
Liquidity/financing risk
Counterparty risk/default/non-performance/insolvency
Downturn risk (continuing recession impacts trading)
2
Directive 2001/24/EC
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A Practical Guide to Contingency Planning and Legal Risk Management
The next step is to consider whether more precise assumptions should be applied to each scenario. There is no
“one size fits all” approach to contingency planning for eurozone related issues and it is important to focus on those
scenarios and/or outcomes with the most potential to have a significant impact on the group.
A comprehensive contingency planning exercise for a group with EU-wide operations might consider, EMS by EMS,
the possibility of sovereign default and bank recapitalisation, as well as the possibility of each EMS leaving the
eurozone (and could go on to consider the impact of withdrawal from the euro by particular combinations of EMSs
and euro break-up).
Alternatively, more limited factual scenarios might be considered. For example, some groups may wish to focus on
the impact of euro exit by those EMSs to which the group is most exposed and/or which it considers to be most at
risk of exit. If a group has a significant proportion of its business in a particular EMS compared with the rest of the
eurozone, it may choose to focus its efforts on euro exit by that EMS.
The secondary or “contagion” risks that may occur regardless of what happens to the euro will also need to be
considered. These include the heightened likelihood of counterparty default and insolvency, the potential for
a contraction in liquidity in the financial markets and the risk that recessionary conditions will adversely affect
trading and the counterparty and credit risk profile of members of the group.
In any event, how the scenarios to be considered might unfold will need to be analysed, possibly with the
assistance of external advisers, to ensure that all relevant features are taken into account.
Step 4 – Prepare for due diligence
Before the due diligence review can begin, its scope will need to be agreed. The group’s material contracts must be
identified in order that they can be reviewed and a conclusion reached as to how they might operate in or be affected by
the assumed scenario(s). Such contracts might include key commercial contracts such as supply agreements, purchasing
agreements and/or licensing agreements, as well as template and standard form documentation (e.g. standard form
terms and conditions of supply, sale or procurement; standard form loans; standard form ISDA schedules, etc.) and policy
documents (such as internal guidelines/policies in relation to new contracts/documentation).
It will also be important to ensure that intra-group exposures are analysed so that, for example, if euro exit is a
concern, the risk to the group of the redenomination of intra-group funding balances to subsidiaries in the exiting
EMS (for example), or the devaluation of the assets of those subsidiaries in the group accounts, is considered.
Depending on the extent of the review and the number of people involved, it may be appropriate to prepare a briefing
paper describing the scope of the exercise, the assumed scenario(s) and the issues to be considered to assist those
involved in due diligence.
For the purposes of the contractual due diligence, a due diligence checklist is likely to be useful to highlight the
factors that might indicate that the arrangement is at risk of disruption in the scenario(s) under review. An
indicative due diligence checklist of general application is included in the Appendix to this memorandum for
illustrative purposes. If a detailed review is to be undertaken, it may be helpful to develop due diligence checklists
for particular types of contract, product or exposure.
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A Practical Guide to Contingency Planning and Legal Risk Management
Step 5 – Due diligence
The likely impact of the identified contingencies on the health and operation of the group’s business will be assessed
during the due diligence exercise, which should highlight the risks which are likely to arise in each of the assumed factual
scenarios. Due diligence may be carried out in conjunction with legal and financial advisers as appropriate.
In many cases, the core of the legal exercise is likely to comprise a review of the group’s (or the relevant
subsidiaries’ or business units’) material contracts.
The issues to be considered in reaching a conclusion on the likely impact on contracts of eurozone exit/break-up
and the possible imposition of capital and exchange controls are explained in Part 2 of this memorandum.
Step 6 – Risk mitigation
Once the results of the due diligence are available, the next question is what steps (if any) can be taken to mitigate
the risks that have been identified. For example, can potentially problematic exposures be reduced or eliminated?
Can contractual terms be amended?
This topic is discussed in Part 3 of this memorandum, which also includes an overview of our perceptions of how these
risks are, at the time of writing, being addressed in practice.
Step 7 – Look forward
It is also necessary to look forward and consider what the business can do to ensure that it is prepared for future
developments. This may involve, for example:
•
the education of key staff with regard to the issues arising out of the crisis;
•
the formulation of guidelines for new exposures/transactions;
•
the development of more detailed contingency plans to deal with certain scenarios. For some it may be
appropriate to consider the full range of internal and external operational risk issues (including the impact on
systems, such as IT and settlement systems, and infrastructure) and the preparation of internal communication
plans (to allow key executives to contact each other and commence meetings or calls at very short notice
in response to rapidly developing events) and external communication plans (e.g. how to interact with key
stakeholders and counterparties), or even “dry-runs” for the occurrence of particular contingencies (see further
section 1.2 below);
•
making changes to the group’s governance processes and authorities to facilitate decision-making in a crisis
(e.g. to allow the rapid movement of deposits or the amendment/termination of material contracts); and
•
identifying which external advisers the group might engage should matters develop (for example, it may be
useful to consider which legal/financial advisers to call on in particular EMSs).
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A Practical Guide to Contingency Planning and Legal Risk Management
The manner in which the group might manage secondary or contagion risks (see Step 3 above) is likely to be an
important part of this aspect of the process. For example, what would the consequences be if the company were
unable to (i) meet its material obligations under its existing arrangements, or (ii) renew existing arrangements
(in particular, pricing and key supply arrangements) on similar terms? How would counterparty default and/or
insolvency affect material supply, transportation, financing or other contracts and the group’s operations?
The potential impact of the crisis on bank financing arrangements and possible refinancing options that might be
considered in the event of a contraction in bank liquidity are considered in Part 4.
Step 8 – Monitor
The crisis is developing day by day and it is likely to be advisable for businesses to continue to monitor
developments and stress-test the agreed scenarios on a periodic basis as the situation evolves. To that end, it may
be helpful to keep in mind a timetable of key dates on which announcements are expected which could affect
events, which will need to be continually updated.
In addition, it will be important to continue to assess whether disclosures in public documents (e.g. financial
reports) require updating to reflect crisis-related risks (such as country and/or currency risks). These requirements
are discussed further in sections 3.7 and 3.8 of Part 3.
As mentioned at Step 1 above, eurozone issues may need to become a rolling board agenda item and a process
put in place to ensure that the Chairman’s, Governance, Finance, Risk and Audit Committees (as applicable, or their
local equivalents) are kept up to date with developments.
1.2 Contingency plans in action
Testing and “dry-runs”
In a crisis, time is likely to be of the essence and the ability to make swift decisions will be key. Accordingly,
following completion of any contingency planning initiative, it may be helpful to test how well the business is
prepared by giving thought to the initial or “Day 1” tasks that might be relevant if the contingency should occur.
Some businesses may wish to go further and test their contingency plans with a full “dry run” based on a specific
scenario, with appropriate assumptions to assess notional exposure, termination rights (ability to terminate and
timing), suspension rights, set-off rights and ability to recover collateral, and likely enforcement options.
To illustrate the sorts of issues that might be considered in the course of a stress test or dry run, the checklist
set out below contains a non-exhaustive list of potential “Day 1” action points that might be relevant upon
management becoming aware that Greece is to leave the euro.
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A Practical Guide to Contingency Planning and Legal Risk Management
“Grexit” – Day 1 action points
Preliminary
Key legal issues
and risks
Remedies
•
Activate internal and external communications plans and allocate responsibilities.
•
Identify material exposures (for example external funding arrangements, commercial
contracts) which may be affected.
•
Identify material arrangements (for example supply arrangements, IT and systems,
custody arrangements) which may be affected.
•
Obtain copies of legal documentation for material exposures and arrangements.
•
Consider whether to engage external legal and financial advisers. Ask advisers to
carry out conflict checks.
•
Consider the impact of new legislation, including local and EU legislation (if
applicable). Obtain local law advice if necessary.
•
Understand and analyse (if applicable) the scope of Greece’s new monetary laws and
other emergency legislation, including capital and exchange controls.
•
Investigate and consider any guidance issued to the markets generally (e.g. by ISDA).
•
Check contractual termination rights and remedies, for example, grounds for
termination, notice periods and process, contractual set-off rights, close-out netting
provisions and rights to retain/enforce collateral.
•
Consider the impact of redenomination and capital and exchange controls on selfhelp remedies (if applicable).
•
If a decision is taken to terminate a contract:
−− ensure appropriate notices are served in accordance with contract;
−− ensure, if appropriate, the group’s outstanding performance obligations (if any)
are satisfied to mitigate the likelihood of counterclaim.
•
Consider litigation strategy and judgments to be sought (if any).
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Insolvency
Strategy
10
If the counterparty is insolvent or at risk of insolvency:
•
consider whether the claim is a proprietary or unsecured claim with reference to
legal documentation;
•
establish which legal framework/insolvency regime applies based on type of
counterparty (credit institutions, investment firms, companies, investment funds);
•
consider the overlay of insolvency and related legislation in conjunction with legal
advisers;
•
consider the impact of any moratorium (if applicable);
•
consider notifying the relevant insolvency official to reserve rights/remedies while
the position is analysed;
•
consider whether a role on any creditors’ committee might be useful (if applicable);
•
continue to monitor the insolvency process and take note of any deadlines/bar
dates;
•
if entering into a contract with an insolvency official, check the validity of his
appointment and the extent of any exclusions of liability.
•
Finalise the group’s strategy and next steps based on identified risks.
•
Consider the applicable decision making process (e.g. requirements for board
approvals and at which level in the group, ability to hold short notice meetings and
quorum, scope of delegated authorities).
•
Call board meetings as required.
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A Practical Guide to Contingency Planning and Legal Risk Management
2.Euro exit/break-up
2.1 Impact on contracts
Eurozone fragmentation clearly has the potential to disrupt contractual arrangements:
•
The withdrawal from the euro by one or more EMS (“euro exit”) may, depending on the circumstances, have a
direct impact on contractual rights and obligations (including deposits) denominated in euro.
•
A break-up of the euro such that it ceases to exist (“euro break-up”) will have a direct impact on all exposures
in euro, at least to the extent that they will need to be redenominated into another currency.
•
The prospect of euro exit or euro break-up also raises the possibility that the exiting country and other
countries might impose capital and exchange controls to protect their economies in the aftermath, which
further complicates the legal analysis.
The manner in which any particular exposure is directly affected (if at all, in the case of euro exit) will be influenced
by a number of variables, in particular:
•
The terms of the relevant exposure: For example, although in many cases, existing contracts will not cover
euro break-up or euro exit specifically, they may contain more generic terms which may operate or be relevant
in this context.
•
The factual scenario: The manner in which any break-up or withdrawal is effected, which countries are
involved and the nature of the accompanying legislative measures (including any exchange and capital
controls) could influence both the types of contract affected and the effectiveness of any risk mitigation
measures.
The possibility of legislation is likely to be a particularly important consideration in relation to euro break-up,
where it would seem very likely that a framework would be put in place at EU level as well as in individual member
states to reverse the process of monetary union and perhaps also to minimise disruption, to the extent that can be
achieved.
The difficulty of predicting the impact on contracts of euro exit or euro break-up with absolute certainty does not
mean that there is no value in planning. It is possible, based on legal principles and contractual terms, to identify
whether a particular exposure is more or less likely to be directly and adversely affected by euro exit or euro breakup. It may not be possible to draw definite conclusions, but due diligence should help to clarify whether and in
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what circumstances it could be appropriate to take steps to reduce an exposure and/or amend contractual terms in
an attempt to preserve the desired outcome should the relevant scenario materialise (as discussed in Part 3). It will
also ensure that the business is fully apprised of the issues that are likely to be relevant, which will facilitate decision
making when (and if) the time comes (as illustrated in section 1.2 of Part 1).
This Part 2 outlines the legal principles which are relevant to an assessment of the direct impact of euro exit or euro
break-up on a group’s material contracts:
•
Redenomination (section 2.2): which contracts should be considered at risk of redenomination?
•
Capital and exchange controls (section 2.3): which contracts are likely to be affected by exchange/capital
controls?
The principles described in sections 2.2 and 2.3 are summarised in section 2.4, which illustrates the headline
factors which might point towards a particular contract being considered at material risk of redenomination or
disruption due to capital and exchange controls if (for example) Greece were to exit the euro.
•
Performance/enforcement (section 2.5): what are the consequences of re-denomination or disruption due to
exchange and capital controls under the terms of the contract?
2.2Redenomination
Redenomination – which contracts are most at risk on euro exit?
In a euro exit scenario, redenomination risk should not affect all exposures denominated in euro, even those with
some nexus to the exiting EMS.
Exposures which present the highest level of redenomination risk in the event of euro exit are those:
•
governed by the law of the exiting EMS; and/or
•
subject to the jurisdiction of its courts.
This is on the basis that the exiting country’s new monetary law establishing its new currency would form part of its
law and thus be applied to contracts governed by that law3 and also to contracts governed by foreign law which are
litigated before the courts of the exiting EMS, as mandatory rules of the forum.
3
12
This applies regardless of the court which hears the dispute save in very limited circumstances. For example, an English court could decline to apply
a foreign law governing the contract on public policy grounds, which might, although would not necessarily, be relevant if an EMS exited the euro
unilaterally in breach of the EU treaties.
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A Practical Guide to Contingency Planning and Legal Risk Management
In relation to contracts denominated in euro which are governed by the law of another country (e.g. English law)
and which are not subject to the jurisdiction of the courts of the exiting EMS, the position is more complex and
depends on the terms of the contract as construed by the relevant court in accordance with the relevant foreign
law.
Whether an obligation in euro in an English law contract will be redenominated or not thus turns on the intentions
of the parties, express or as implied by the court, and a consideration of the legal concepts of “nominalism” and the
“lex monetae”.
Nominalism and the lex monetae
“Nominalism” is a well established principle of English law. Where a monetary obligation is expressed in a
particular currency, there is an implicit choice of the law of the country of that currency, the “lex monetae”, to
determine what that currency is (the currency of the contract or the “money of account”).
Thus where the currency referred to is used only by a single country, a simple reference to the relevant currency in
a contract (by words or symbol), in the absence of evidence to the contrary, provides the signpost to the applicable
lex monetae and therefore the applicable money of account.
In cases of uncertainty (for example, an obligation expressed in “dollars” does not, of itself, indicate a single country
as providing the lex monetae), the applicable lex monetae requires the construction of the contract in accordance
with its governing law. If the contract is governed by English law, based on ordinary principles of contractual
construction, the parties’ intentions will determine the law which applies to determine the money of account.
The parties’ intentions will, of course, most likely need to be inferred. Upon entry into the contract, the parties may
have given careful thought to the governing law of the contract, but may not have directed their minds specifically
to the applicable lex monetae.
In such cases, according to the leading English law texts, the lex monetae is presumed to be provided by the
country which has the closest connection with the obligation in question. In the limited number of cases where the
courts have been called on to consider this issue, certain features have been identified as indicative of the parties’
intentions as to the country of the lex monetae. These are presumptions rather than legal principles, and may not
be conclusive in any particular case. They include the following:
•
the designated place of payment;
•
the status of the debtor (government entities and public authorities might, in some cases, be presumed to
intend to contract in their home currency);
•
a course of dealing between the parties (this could be a relevant factor in long-term contracts which pre-date
the euro and were originally performed in the national currency of the exiting EMS); and
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•
the “setting of the contract” – in other words, taking all of the circumstances of the contract into account,
which country would the parties have had in mind?
There is a question, however, as to the extent to which the existence of these features in a contractual arrangement
in euro would give rise to such a presumption.
Euro exit and the importance of the intention of the parties
The nub of the issue is that the prospect of a single monetary system as complex as EMU, let alone its break-up,
was not contemplated at the time at which the common law in this area developed. Accordingly, the common
law presupposes that each state retains sovereignty over its own currency and is responsible for designating what
is legal tender in its own territory. In each of the eurozone countries, a supranational EU law designates the euro
as legal tender. In other words, the substantive lex monetae of each eurozone country is the same. While it might
perhaps not be technically accurate to refer to the EU as providing the lex monetae applicable to contractual
obligations expressed in euro (as it is not a country), in effect, that is the case.
In an English law contractual dispute, the court’s task is to determine the intention of the parties. The
presumptions that have been invoked in the historic caselaw are factors which the English courts thought indicative
of the parties’ intention to contract using the currency of a particular country. The view might be taken that where
the language and circumstances of the contract indicate the money of account as euro, the intention of the parties
is to maintain euro as the money of the account for so long as the euro exists. It would be a significantly more
radical exercise in many cases to impute an intention to contract by reference to the lex monetae of a particular
country in the event of euro exit.
The courts could take the approach, for example, that the starting point for the construction of monetary
obligations in euro in English law contracts might be a presumption that, in the absence of clear evidence to the
contrary, a reference to “euro” reflects the parties’ choice of the monetary law of the EU, which determines what
is legal tender in the eurozone from time to time. On that basis, in many cases an English court should be able
to consider a reference to “euro” as sufficient evidence of the parties’ intentions to contract in euro for as long as
the euro exists, in the same way as it would be likely in most cases to construe a reference to “yen” as an implicit
choice of the laws of Japan to provide the lex monetae. In many cases, construing parties’ intentions in this manner
is likely to be consistent with business common sense and thus the general approach taken by the English courts to
cases of contractual construction.
The argument that “euro means euro” may be even more persuasive where other provisions of the contract are
predicated on euro payments. For example, if a loan facility is set up in euro, with interest payable by reference
to EURIBOR and provides for the application of European market calculation and payment conventions, it might
seem reasonable to conclude that the parties’ intentions (absent clear indications to the contrary) were to
contract by reference to the lex monetae of the eurozone as constituted from time to time. The arguments against
redenomination might be expected to be strongest in cases where the meaning of the term “euro” is defined and
the parties’ intentions with regard to the money of account are expressly stated (this is discussed further in section
3.3 of Part 3).
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Conversely, there may be cases where it is clear that the parties intended to contract by reference to the lex
monetae of a particular country. The most obvious example is contracts which pre-date the introduction of the
euro which were expressed and performed in the national currency of the exiting country until redenominated
into euro by operation of law. In those circumstances it would seem difficult to argue that the parties intended to
contract other than under the lex monetae of the exiting state. However, if the arguments above are sound, one
might hope that such cases would be limited.
Residual uncertainty
If one or more countries were to exit the euro, an English court (as outlined above) may be able to find good
reasons to determine that obligations in euro in an English law contract remain as such in most cases, based on
the intentions of the parties. In relation to certain types of commercial contract, it may thus be possible to prevail
with the argument that, if the parties have expressed their obligations in euro, their intention is to maintain their
obligations in euro for as long as the euro exists, notwithstanding euro exit by one or more EMSs. It will therefore
be helpful to consider which, if any, provisions of key exposures in euro might provide evidence of the parties’
intentions to maintain the euro.
However, the problem of certainty remains. The application of nominalism as expressed historically to the euro
or “€”, a currency shared (currently) by seventeen different countries, is uncharted legal territory. It might be
considered unlikely, but it is not possible to state conclusively, whether the court would go back to first principles
and consider the appropriate starting point when approaching the construction of obligations in euro or would find
it necessary to adopt the presumptions described above based on precedent.
In summary, until the legislature or the courts take a view as to how the lex monetae principle should be applied
to the euro, the risk that the arguments outlined above will not prevail cannot be disregarded completely and a
cautious approach to contingency planning for euro exit should take into account the existing case law. English law
contracts with features that might be indicative of an intention to contract by reference to the lex monetae of a
particular EMS (for example, which require payments to be made in that country) might prudently be viewed as at
some risk of redenomination if that country were to exit the euro.
Redenomination and euro break-up
It is also important to note that the courts, in the absence of a legislative solution, would have to find an approach
to determining a single country of the lex monetae applicable to obligations expressed in euro in the event of euro
break-up.
As would be the case upon euro exit, upon euro break-up contracts governed by the law of a particular EMS and/
or litigated before the courts of a particular EMS might be expected to be redenominated into the currency of that
EMS. In other circumstances, the currency into which the relevant contract should be redenominated may be more
difficult to determine.
It might be anticipated that the legislative framework (if any) put in place in the country whose law governs
the contract or in the courts of which the dispute is litigated would influence the outcome. In the absence of
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legislation, it is possible that the English courts might try to determine a single lex monetae by reference to the
“setting of the contract” presumptions described above. A further possibility might be to construe “euro” by
reference to the basket of national currencies which formerly comprised the euro (again something which might
conceivably be addressed in legislation).
As a result, conclusions are more difficult to draw in a break-up scenario and the best preparation is likely to be to
identify those factors (as described above and summarised in section 2.4 below) which could influence the issue
and would need to be analysed in conjunction with any applicable legislative regime should the need arise.
2.3Capital and exchange controls
What are they?
Capital and exchange controls are measures which can (among other things) be used in times of crisis to protect
financial stability:
•
Capital controls are limits or restrictions imposed by a particular country on inflows or outflows of capital, for
example, restrictions on the ability of the nationals of a particular EMS to make transfers of euro to another
state. Typically, such controls will limit the purpose for which such transfers may be made, and will require
prior government or central bank authorisation for transfers above a nominal amount. Capital controls may
also involve transaction taxes (such as the Commission’s proposed “Tobin” tax) to reduce the volume of
financial transactions.
•
Exchange controls affect current as opposed to capital transactions, and comprise measures which restrict
flows of foreign currency into or out of a country. Exchange controls might, for example, restrict the ability
of nationals of a particular EMS to exchange euro for a different currency (e.g. US dollars), or to enter into
transactions in goods or services where payment is required to be made or received in a currency other than
euro.
Why might they be imposed upon euro exit/break-up?
The possibility of capital or exchange controls in the present context might arise as a result of sovereign default
and/or a banking crisis in the country, as well as a fragmentation or break-up of the eurozone:
•
A defaulting EMS or an EMS at risk of default or at risk of euro exit might impose controls on euro outflows to
prevent runs on euro deposits in its banks.
•
A weaker EMS which exits the euro might impose controls on euro outflows to protect its new currency against
depreciation and to protect its banking sector. (In contrast, if a stronger EMS were to exit the euro, it might
impose controls on euro inflows (“hot money”) to protect its new currency against appreciation.)
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•
Capital and exchange controls might be imposed by EMSs across the eurozone should the crisis (e.g. an exiting
or defaulting EMS) trigger fears of bank runs in other countries at risk of contagion (e.g. as a result of their
exposure to the exiting or defaulting EMS).
It must also be recognised that capital and exchange controls may not only be imposed by eurozone countries,
in particular in the context of euro break-up or euro exit. For example, earlier this year, according to reports, as
demand for the Swiss franc continued to rise, the Swiss National Bank indicated that it could consider imposing
restrictions on foreign capital entering Switzerland to stop further inflows putting pressure on the franc in the event
of euro exit.
Legal framework
By way of background, it is worth noting that capital and exchange controls are subject to certain supra-national
legal constraints. These legal constraints do not mean that capital and exchange controls cannot be imposed in
particular circumstances (for example, in response to a financial crisis), but they would need to be (or should be)
taken into account in the design and implementation of any such measures.
For example, and perhaps of most relevance in the present context, the ability of an EU member state to impose
capital and exchange controls is constrained by the Treaty of Lisbon, which guarantees the free movement of
capital and payments within the EU. However, restrictions are permitted where justified on the grounds of public
policy or public security, and it might be argued that capital or exchange controls imposed by the relevant EMS to
safeguard financial stability leading up to or following sovereign default, a serious banking crisis or eurozone exit
might be justifiable on this basis provided they are non-discriminatory and proportionate.
It would seem unlikely that an EMS would seek to impose measures (e.g. restrictions that only affect residents or
nationals of other EMSs) which constitute arbitrary discrimination (and which would seem likely also to fail the
proportionality test as not being suitable to achieve the objective of financial stability). Ultimately the question
of whether particular restrictions are disproportionate, or are an arbitrary means of discrimination will depend on
the terms of the relevant restrictions, the economic situation prevailing when they are imposed and whether less
restrictive measures would have been effective to protect financial stability.
The same considerations will need to be taken into account should other EU countries wish to impose capital and
exchange controls to protect themselves against the impact of events in the relevant EMS.
Which obligations might be affected?
The possibility of exchange and capital controls is an important but complicating factor in contingency planning
for euro exit or euro break-up. If nationals of a state which imposes capital and exchange controls are unable
or restricted in their ability to invest abroad or make payments in euro, this may inhibit both (i) their ability to
perform pre-existing obligations in euro and (ii) their counterparties’ ability to enforce their obligations in euro as
originally drawn.
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Such controls may thus affect the manner and likelihood of performance or enforcement of euro-denominated
contracts, even in circumstances where, based on the terms and other circumstances of the contract (and the
analysis outlined in section 2.2 above), it has been designated as presenting a low risk of redenomination.
In summary, subject to the obvious point that the impact of capital and exchange controls depends entirely on
their formulation and the imposing country, capital and exchange control restrictions on the performance of any
obligation, or the performance of an obligation in euro, might be anticipated as most likely to affect:
•
obligations governed by the law of the imposing country, or adjudicated by its courts;
•
obligations to be performed or paid in the imposing country;
•
obligations under “exchange contracts” within the meaning of the IMF Articles of Agreement (the “IMF
Agreement”) (see further below).
The presence of these features might therefore be considered as indicative that there is material risk that the
contract would be affected, in addition (in the case of the first two features) to being potentially indicative of
redenomination risk, as explained in section 2.2.
The reasons for highlighting these features in relation to capital and exchange controls are explained briefly below.
Obligations governed by the law or subject to the jurisdiction of the imposing state
The governing law of a contract governs, among other things, its performance. Thus, an English court would be
expected in most circumstances to recognise and enforce exchange controls (for example) which inhibit or prohibit
the performance of a contract governed by the law of the imposing country.
For example, an English court would most likely not enforce a contract governed by the laws of Greece for the
payment of euro by a Greek party in Athens to an English party in London if Greek law placed restrictions on or
prevented performance.
In addition, if the forum of the dispute is the imposing state, the courts of that state may refuse to enforce the
performance of a contract governed by foreign law if to do so would conflict with local exchange and capital
controls, on the basis that the capital/exchange controls form part of the mandatory laws of the forum.
Obligations to be performed (paid) in the imposing state
In construing a contract governed by English law, an English court will take into account the laws of the place of
performance. Thus the place of performance of a contractual obligation can have important implications with
regard to its enforceability and manner of performance.
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The key point is that an English court will not enforce an English law contract in so far as it is to be performed
abroad, if the laws of the place of performance (e.g. exchange control laws in force in that country) would render it
illegal to do so. In such circumstances, the contract is likely to be frustrated (see further section 2.5 below).
This possibility will arise only if performance of the obligation includes the doing in a foreign country of something
which the laws of that country make it illegal to do. It is insufficient that the law of the place of performance
excuses performance or that the act is illegal by the law of a country where it happens to be done if there was no
requirement for the act be performed there.
“Exchange contracts” and the IMF Agreement
Article VIII(2)(b) of the IMF Agreement provides that exchange contracts which involve the currency of any member
and which are contrary to the exchange control regulations of that member, maintained or imposed consistently
with the IMF Agreement, shall be unenforceable in the territories of any IMF member.
An “exchange contract” within the scope of Article VIII(2)(b) which contravenes exchange control regulation,
regardless of its governing law, will thus not be enforced in the courts of an IMF member (which includes the
English courts and those of all EU member states).
The important question therefore is what constitutes an “exchange contract” for these purposes, a topic which has
received extensive academic and judicial scrutiny and as to which there are differing views:
•
English law interprets the term “exchange contracts” narrowly, comprising only contracts concerned with
the exchange of currency. This might include, for example, cross-currency swaps and physically settled FX
transactions.
•
The laws of other countries construe the term more broadly, as including all contracts which in any way affect
a country’s exchange resources. This would include not only contracts for the exchange of one currency for
another, but any contract which directs resources out of a country, for example, contracts creating debts in
favour of non-residents or which provide for the transfer of securities to a non-resident.
This is a further reason why it is important to focus on the governing law of the contract in the context of euro exit
or euro break-up scenarios. Effective contingency planning for the imposition of exchange controls by particular
countries may require an investigation into the views of the local courts as to what constitutes an “exchange
contract”.
There are also divergent views as to whether an English court would hold obligations in existence at the time the
relevant exchange controls are imposed as unenforceable exchange contracts pursuant to Article VIII(2)(b). In other
words, it is uncertain whether exchange controls which purport to apply to pre-existing contracts would be treated as
compliant with the IMF Agreement so as to be within the scope of Article VIII(2)(b)4.
4
The IMF proceeded on the basis that the controls put in place by Iceland did apply to pre-existing transactions.
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The debtor/its assets are located in the imposing state
Exchange and capital controls may affect the enforceability of judgments as well as the enforceability of the
obligations.
In other words, enforceable obligations may not escape being affected by capital or exchange controls if the
debtor’s assets are in the imposing state and therefore any judgment obtained needs to be enforced in the courts
of the imposing state. The enforcement of foreign judgments is considered further in section 2.5.
2.4Key risk indicators
The diagram below summarises the key indicators of redenomination/disruption risk should Greece leave the euro
and impose capital and exchange controls. It illustrates, in a simplified manner, the headline issues that might cause a
contract to raise a “red flag” in due diligence, to indicate that it is likely to be at material risk of being affected.
Q:Governing law?
Greece
England
Q:Jurisdiction?
Greece
England
Q:Place of payment/performance?
Greece
England
Q:Contract terms indicate euro should
prevail (e.g. definition of euro)?
Yes
No
Q:With which country is the contract
most closely connected?
Not Greece
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2.5Performance/Enforcement
Terms of the contract
Once the likelihood of any particular contract being redenominated as a result of euro exit or being disrupted
as a result of capital and exchange controls has been assessed, the next step is to examine the consequences of
redenomination and/or disruption under those categories of contract which have been identified as “high risk”.
As stated at the outset, the impact on contractual arrangements of euro break-up or withdrawal will primarily
depend on the terms of the contract. Any type of contractual obligation could, for example, provide for termination
in that event, although it might be expected that few existing contracts would fall into that category.
Accordingly, it may be appropriate to consider in relation to material contracts, how the more generic terms of the
contract would operate in a euro exit or euro break-up scenario.
Relevant terms to consider include:
•
currency and payment provisions;
•
costs indemnities;
•
set-off rights;
•
rights excusing further performance (e.g. rights to cease supplying the product in supply contracts or drawstop
conditions in undrawn loans);
•
variation rights;
•
rights to enforce credit support (e.g. security and guarantees); and
•
termination rights and events of default.
Termination or cancellation rights warrant particular focus. For example, euro exit might trigger material adverse
change (“MAC”) or other events of default or may trigger a force majeure clause.
Some MAC or force majeure clauses could be triggered by euro exit/break-up depending on how they are drafted.
It is also possible that euro exit or break-up could prompt a slide in the financial condition of one of the contracting
parties, which leads to default or termination of the contract. However, if such clauses are not specifically aimed at
the relevant scenario, in many cases it can probably not be said with any certainty whether they would operate.
For example, neither the Loan Market Association (“LMA”) recommended forms of loan agreement, nor the ISDA
Master Agreements contain Events of Default or Termination Events which are specifically aimed at euro exit
or break-up. Further, LMA-based loan agreements (in contrast to loan mandate letters and bond subscription
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agreements) do not generally contain MAC or force majeure provisions which operate by reference to conditions in
the financial markets (operating instead primarily by reference to the financial condition of the borrower group).
Frustration
A contract cannot be frustrated by an event for which the contract makes provision. However, if the terms of the
contract do not provide for the consequences of redenomination, illegality or unenforceability, it will be necessary
to consider the consequences under the general law.
If the performance of a contractual obligation governed by English law becomes illegal or impossible as a
result of an external event or circumstance, the contract may be frustrated. In general, our expectation is that
redenomination, of itself, is unlikely to render most obligations in euro incapable of performance. However, it is
of course possible, as explained in section 2.3 above, that the imposition of capital or exchange controls could
render the performance of contractual obligations in euro illegal in the imposing EMS, and illegality in the place of
performance is generally treated as a category of frustration.
In addition, there might be certain limited categories of contract, the performance of which is rendered so
“radically different” as a result of a euro fragmentation scenario that frustration is considered to be a material
risk. Consider, for example, the impact of the euro being dismantled in its entirety on a contract for differences in
EURIBOR.
If a contract is frustrated, the parties will be discharged from further performance. The Law Reform (Frustrated
Contracts) Act 1943, which applies to contracts governed by English law which have become impossible to perform
or otherwise frustrated, in broad terms, provides for the recovery of payments made prior to discharge, with the
general aim of preventing unjust enrichment.
However, as mentioned above, a contract can be frustrated only by unforeseen events. Thus, if a contract makes
express provision for the event in question (for example, by providing for the consequences of a change in law), the
mechanics of the contract will supersede considerations under the general law.
Connected/related exposures
The impact of disruption to particular exposures on related or connected exposures must also be examined. For
example:
•
Could cross-default provisions be triggered?
•
Would credit support/related contracts be affected?
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If an exposure is at risk of redenomination and/or termination as a result of the assumed factual scenarios, it will
be relevant to consider the impact on related exposures. In particular, the availability of related credit support
measures e.g. guarantees, security or credit default swap protection should be considered.
Conversely, the availability of credit support should be considered in relation to contracts which might not
necessarily be affected directly by euro exit or break-up. For example, an English law euro loan agreement subject
to the exclusive jurisdiction of the English courts, with payments required to be made in London, might not be
considered a contract at high risk of disruption if an EMS leaves the euro. However, if the security package includes
assets in the relevant EMS and/or is governed by the law of that EMS, those arrangements may be affected and
have an impact on the facility itself.
Enforcement of foreign judgments
As already noted, an enforceable obligation in euro under the laws of one country is of little practical assistance
to the creditor if the debtor, in compliance with the laws of another country, most likely its home country, fails to
perform (or perform in the manner required by the contract).
It is also important to recognise the risk that the restrictions which inhibit the debtor’s performance could also
prevent the creditor from enforcing a foreign judgment against the creditor in its home jurisdiction.
The influence of the location of the debtor and the debtor’s assets is perhaps best illustrated in the context of
exchange controls (although it is also relevant to any consideration of the impact of euro exit or break-up):
•
Greece exits the euro and puts in place IMF-approved exchange control regulations which prohibit Greek
nationals from making payments in euro outside Greece.
•
A Greek issuer of English law euro-denominated bonds listed in London is required to make interest payments
in London.
•
As it is simply the fact of the debtor’s residence that renders the payment illegal, frustration (as described
above) would not necessarily follow. The contract is not illegal according to its governing (English) law.
•
The contract is not an “exchange contract” within the meaning of the IMF Agreement as interpreted under
English law.
•
The Greek issuer fails to perform, leaving the non-defaulting party with a debt or damages claim or other
remedy provided for in the contract which may not be recognised by the Greek courts.
The example above illustrates that a claimant’s ability to recoup what it is owed will depend not only on whether
the contract is enforceable, but on whether the defendant has assets in the United Kingdom (or in another
jurisdiction that will recognise an English judgment). Contingency planning may require a consideration of
enforcement strategy in relation to potentially high risk exposures.
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2.6Sample due diligence checklist
The Appendix contains a sample legal due diligence checklist, based on the risk factors highlighted in this Part 2,
which general counsel and other in-house lawyers may find helpful for the purpose of identifying contracts which
might be considered as at material risk of being disrupted in a euro exit or euro break-up scenario.
It is included by way of example to illustrate the sorts of issues that in-house legal and business teams tasked with
assessing the impact on contracts of euro exit or euro break-up might be advised to look for and analyse.
The issues highlighted in the sample checklist are likely to be of relevance to all types of contract, although specific
considerations may be applicable to particular types of contract.
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3.Risk mitigation
3.1 Approach to risk mitigation
Following completion of the initial impact assessment and due diligence, the business should have a reasonable
picture of the nature and extent of the likely impact on the group of the assumed scenarios. The next step in the
contingency planning process (Step 6 as described in section 1.1 of Part 1) is to look at whether it is appropriate and
possible to address the issues identified in relation to (i) existing exposures and (ii) new exposures.
In theory, the best ways to mitigate the impact of the potential scenarios and outcomes arising out of the crisis are
likely to include:
•
withdrawal from “at risk” jurisdictions;
•
the termination of dealings with and/or insisting on external credit support for the obligations of counterparties
in “at risk” jurisdictions; and
•
making provision for the payment of all monetary obligations in a currency other than euro.
These options may be available in limited circumstances, but on the assumption that business needs to continue in
the eurozone, more practical strategies are necessary.
Parties may therefore consider amending the terms of certain potentially affected exposures, or including express
contractual provision for particular contingencies in an attempt to preserve the desired outcome should the
relevant scenario materialise. It may also be useful to put together a checklist of provisions to be considered for
inclusion in new contracts.
The sorts of provisions that might be considered in the context of euro exit and euro break-up are described below,
although what is appropriate in any particular situation is a commercial decision to be taken on a case-by-case
basis. The risk that any such measures might be overridden by legislation in the event must also be acknowledged,
but some may take the view that doing something is better than doing nothing.
3.2Choice of law and jurisdiction
Exposures which are most at risk of redenomination and/or disruption in the scenarios under consideration are
those which are governed by the law or subject to the jurisdiction of those EMSs which are perceived to be at risk of
default or of euro exit.
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Thus it may be advisable in appropriate contracts to select a governing law and forum for disputes outside the
eurozone. For example, the parties may provide expressly that the contract is to be governed by English law and
submit expressly to the exclusive jurisdiction of the courts of England.
It may be possible to alter the governing law and submission to jurisdiction chosen in existing or new contracts
in certain contexts. However, in others, this may be difficult. In some types of contract (for example, syndicated
loan agreements) market practice tends to dictate the style of jurisdiction clause and regulatory and enforcement
considerations may influence the choice of governing law.
3.3Redenomination risk
There are a number of other strategies that might be considered with the aim of minimising redenomination risk in
particular contracts:
•
Definition of “euro”: A definition of “euro” may assist an English court in interpreting obligations expressed
in euro in an English law contract. For example, if the parties wish to reduce the risk of redenomination, a
provision along the following lines may be helpful:
““Euro”, “euro”, “€” and “EUR” denote the lawful currency of each member state of the European Union which has
the single currency of the European Union as its lawful currency in accordance with the treaties of the European
Union.”
Another approach might be to seek to preserve the euro but also to prescribe the circumstances in which
redenomination is acceptable, for example:
““Euro”, “euro”, “€” and “EUR” each refer to the lawful currency of [specify member state] as of [the date of this
contract]. If [specify member state] should at any time officially adopt a different currency, all amounts expressed
in euro shall be converted into such other currency in accordance with the exchange rate [adopted by the
competent authorities of [specify member state] for such purpose]/[specify other exchange rate].”
Or even:
““Euro”, “euro”, “€” and “EUR” each refer to the lawful currency of [specify member state] from time to time.”
•
Express choice of money of account: A definition of euro could be coupled with an express choice of the
currency of account and currency of payment for obligations expressed in euro:
“Euro [as defined] shall remain the currency of account and the currency of payment for any sum due [from any
party] under this agreement, notwithstanding changes in the membership of the eurozone after the date of this
agreement.”
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Such a provision may not, however, operate in the creditor’s favour in all circumstances, for example if
Germany left the euro.
Whether exceptions to this type of provision should apply would also need to be considered. For example,
if the agreement contains obligations in currencies other than euro as well as obligations in euro, it may be
necessary to extend the above provision to that effect, for example:
“…save that any amount expressed to be payable in a currency other than euro shall be paid in that other currency.”
•
Indemnity against currency risk: The risk of exchange rate losses as a result of obligations in euro being met in
another currency following euro exit or euro break-up might also be addressed expressly. This is likely to require
specific indemnity provisions in addition to the types of currency indemnity that are more commonly included
in cross-border commercial contracts. For example, a typical currency indemnity might address the situation
where a contracting party discharges his obligation in a different currency to that expressed to be due in the
contract. However, it is unlikely specifically to cover the situation where the obligation itself is redenominated
and thus becomes due in a different currency.
Such an indemnity would need to cover exchange rate losses between the date on which the currency of
account changes and the date of payment. An alternative would be to adopt a “revalorisation” mechanic,
which seeks to adjust the amount due under the contract in the currency of account by reference to
movements between two currencies or an index.
•
Designation of place of payment/performance outside eurozone: There are some doubts as to the extent to
which the place of payment of a monetary obligation might colour a court’s view of the lex monetae applicable
to an obligation in euro (as discussed in section 2.2 of Part 2). Nonetheless, where possible, contracting parties
may wish to rebut any presumption that might otherwise arise by stating clearly in which country payments
are required to be made. The point is, of course, also relevant in the context of contractual disruption due to
exchange and capital controls and counterparty/performance risk.
If it is not possible or practical to alter the place of payment or performance of a particular obligation,
consideration might be given to including rights to alter or vary the place of payment or performance based on
the occurrence of specified trigger events that might be indicative that the risk of the feared event is increasing
(e.g. a rating downgrade of the debt of a particular country).
•
Substitution for non-eurozone currency: It may also be possible to draft provisions which specify a fallback
or substitute currency to replace the euro as the currency of the contract in the event of euro break-up or euro
exit. This might be a mechanic which converts euro obligations into a different currency upon euro exit, for
example, sterling or US dollars.
However, such provisions can be challenging to formulate in a manner which is acceptable to both debtor and
creditor. The unpredictable manner in which euro exit or euro break-up might occur makes it difficult to define
at what point in the process the substitute currency should apply. It may thus be more practical either to leave
the point at which substitution occurs to the discretion of one party (which is unlikely to be acceptable to the
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other party, given the potential for currency losses and the impact on any currency hedging arrangements) or
possibly to link it to a deterioration in country or bank credit ratings.
In addition to the need to specify at what point the currency switching provision should be triggered, it will
be necessary to define the exchange rate at which redenomination should be effected, which may also be
contentious. A pre-agreed set rate may be unappealing. The alternatives might include leaving the rate to the
discretion of one party or using a specified spot rate of exchange on or shortly prior to the date of payment.
There are a variety of drafting options to be explored and what is appropriate in any particular case will require
commercial input. For example, scenarios can be envisaged where the parties may wish to acknowledge and
provide for the possibility of redenomination, rather than take steps to avoid it, to circumvent asset/liability
mismatch issues.
3.4Performance/enforcement
If a concern has been identified about the enforceability of particular contracts or their enforceability in euro (e.g.
based on the risk factors highlighted in Part 2), it is important to consider what sorts of “self-help” rights might be
incorporated into the contract to limit the extent of any losses and to facilitate recoveries. Contractual provisions
that might be considered include the following:
•
Tailored termination events: The preferred outcome for certain contractual arrangements (whether involving
euro obligations or not) may be that they become terminable at the option of one or more parties, or
otherwise come to an end, whether or not performance becomes illegal and/or impossible. For example:
−− in a sale and purchase agreement relating to assets situated in an EMS which is considered to be a default
risk or at risk of euro departure, the purchaser may wish to make completion conditional upon the events of
concern not having materialised;
−− financial institutions may not wish to be bound by commitments to provide or underwrite corporate
financing such as loans or bonds in particular circumstances; and
−− parties to some currency hedging arrangements may wish to provide expressly for termination in the event
of changes to the euro.
The drafting will depend on the scenario to be addressed and the nature of the transaction. It may, for
example, be appropriate to deal with this issue as an additional limb of a “material adverse change” or force
majeure provision.
•
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Provision for consequences of illegality/impossibility: As an alternative to providing for termination in such
circumstances, the parties may wish to think about alternative bases on which the obligations might continue.
For example, can the obligations be novated to different parties, can the contract operate by reference to a
different currency or should the designated place of payment and/or performance be changed?
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•
Express provision for continuity: A contractual provision aimed at ensuring continuity might be drafted along
similar lines to the provisions that were used during the transitional period of euro adoption:
“The parties agree that the departure of one or more member states from the euro will not, in and of itself, have the
effect of altering any term of, or discharging or excusing performance under this agreement nor give any party the
right unilaterally to alter or terminate this agreement.”
•
Variation rights: It may also be sensible to incorporate a mechanism for varying those provisions of the
agreement which might require adjustment to ensure that the obligations continue, and, maybe also that as far
as possible, the parties’ commercial position is preserved. The LMA’s recommended forms of loan agreement,
for example, contain a clause which is aimed at ensuring that the agreement continues to operate smoothly in
the event of a change of currency in a particular jurisdiction:
“…if a change in any currency of a country occurs, this Agreement will, to the extent the Agent (acting reasonably
and after consultation with the Company) specifies to be necessary, be amended to comply with any generally
accepted conventions and market practice in the Relevant Interbank Market and otherwise to reflect the change in
currency.”
The clause does not contemplate euro break-up specifically but a provision along those lines could be adapted
to address that situation more precisely, and for use in other types of agreement.
•
Indemnities and other protective provisions: Although agreements may contain general costs indemnities,
it may be appropriate to draft provisions which are specifically designed to allocate the risk of increased costs/
losses.
•
Restrictions on assignment/novation: In some contracts which can be assigned or novated, it may be
appropriate to impose express restrictions on the transfer or assignment to, or the accession of parties resident
in, particular countries5, or on parties identified in other ways (for example by reference to credit rating), to
minimise counterparty risk. Similarly, contracting parties might be restricted from changing their nationality or
main place of business or moving assets which are the subject of security into particular jurisdictions.
•
Credit support/guarantees: Consider whether to designate that as far as possible, credit support (for example
in the form of security or guarantees) must be provided by parties located outside the eurozone with assets
located outside the eurozone. It is worth noting in this context that guarantee obligations are secondary
obligations, contingent on the validity of the principal obligation. If the principal obligation is potentially
of doubtful enforceability, it may be worth investigating primary credit support obligations (e.g. indemnity
obligations, standby letters of credit or other alternative forms of support).
5
Although case-by-case consideration might need to be given to whether such measures might conflict with the EU Treaty requirements for free
movement of capital and payments.
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•
Set-off and self-help enforcement rights: The collapse of Lehman Brothers illustrated for many the
importance of self-help remedies upon default and in particular upon the entry of a counterparty into
insolvency proceedings. The availability of contractual rights of termination (e.g. for illegality or force majeure)
and set-off can be valuable. Other self-help enforcement rights include the ability to appropriate collateral
without formal enforcement proceedings (e.g. in reliance on the EU financial collateral regime). Such rights
may be important, for example, to parties faced with an “exchange contract” (see section 2.3 of Part 2) which is
unenforceable in the courts but not illegal.
3.5What is happening in practice?
There is evidence that companies are taking steps to address counterparty and credit risk issues arising as a result
of the crisis. Suppliers, for example, are taking steps to improve payment terms e.g. by requiring credit support or
advance payment from counterparties in jurisdictions perceived as more vulnerable. This is the case in relation to
Greece in particular, following reports earlier this year of the withdrawal of credit insurance cover for exports to
Greece by some of the major providers.
There is less evidence, however, that companies are taking steps to manage the risk of euro exit or euro break-up
contractually.
It is not yet routine but it is becoming more common to see a “vanilla” definition of euro (as the currency of the
participating EU member states) in euro denominated contracts. In addition, most commercial counterparties are
by now conscious of the potential advantages of designating the place of payment of euro obligations in a country
outside the eurozone and of the influence of the parties’ choice of governing law and jurisdiction on the likelihood
of redenomination of euro obligations in a euro exit or break-up scenario.
However, we have observed very limited adoption of provisions which are more overtly tailored to address the
more extreme scenarios such as euro exit. This is the case, in our experience, in both financing documentation
(discussed in more detail in section 3.6 below) and in other types of arms’ length commercial contracts (where
market practice may place less constraint on what is advisable or achievable).
There are a number of possible reasons why commercial parties have been slow to address redenomination risk and
related issues in euro denominated contracts:
•
The crisis has continued in an “active” state now for about three years. It has moved extremely slowly. Some
businesses may not therefore class the risk of eurozone exit (for example) as sufficiently material to deal with
(or may not have done so until more recently).
•
Financial institutions and public sector entities based in the eurozone may be reluctant for policy reasons to
acknowledge the possibility of eurozone exit or break-up specifically.
•
It can be difficult to agree specific contract terms which are acceptable to all parties. Any attempt to prescribe
the outcome of euro exit by a particular country is likely (if effective when used) to result in exchange rate
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losses for the debtor and gains for the creditor (or vice versa). Even among counterparties of the same class
there are likely to be different views on when and whether the euro should be preserved. The perspective of any
particular party will depend, among other things, on whether it is a debtor or a creditor, the possibility of asset/
liability mismatch and the contingencies which it considers most likely to occur.
•
There are doubts about the efficacy of clauses drafted to operate upon euro exit. Such provisions are unlikely
to have much effect in contracts governed by the law of the exiting country, or subject to the jurisdiction of its
courts. An English court should have little reason to interfere with the parties’ intentions as stated in an English
law contract, but even if upheld, a valid claim for euro is of limited use if it cannot be performed or enforced in
euro, for example (as discussed in Part 2) as a result of capital and exchange controls, insolvency rules or the
location of debtor’s assets.
•
Parties may be reluctant to take steps to entrench a contractual outcome in relation to a particular factual
scenario in circumstances where the likelihood or predictability of that scenario among a number of variables is
unclear.
The position, of course, may change. A perception that little has developed in terms of market practice in this area
to date should not automatically lead to the conclusion that attempts at risk mitigation are not worthwhile. In our
view, it is important that these issues continue to be monitored and discussed.
3.6What is happening in practice – financing arrangements
In general
It seems that as a result of the crisis, many corporate treasurers are taking steps to address counterparty risk and
to consider the resilience of investment and custodian arrangements (in particular, legal risks relating to cash and
securities). According to reports, a number of corporates have daily cash sweep arrangements in place to remove
euro from high risk jurisdictions and/or banks and to convert euro in excess of requirements into other currencies.
A number of companies have also taken steps to amend intra-group loan agreements in euro with group
companies in weaker EMSs to protect against redenomination risk. In many cases, this has involved the addition of
a definition of euro, express provision for a place of payment outside the eurozone if possible and the inclusion of
an express choice of English law and a submission to the jurisdiction of the English courts in the loan agreement.
However, we have not seen significant changes being made to the terms of external loan, bond or derivatives
documentation which are aimed specifically at euro exit or euro break-up risk.
In part, this may be because the existing terms of many types of English law financing contract in common usage
include a variety of provisions which might be invoked in support of arguments against redenomination. Many
financing contracts also prescribe in detail the consequences of illegality and non-performance.
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For further information on how the typical terms of loan, bond and derivatives documentation might operate
in a euro exit or euro break-up scenario, please refer to our briefing, “Euro break-up/fragmentation – Impact on
financing documentation6” which considers these issues by reference to the LMA recommended forms of loan
agreement, typical corporate eurobond terms and the ISDA Master Agreements.
Some further observations with regard to the impact of the crisis on loans, bonds and derivatives, based on
developments in the last few months, are set out below.
Loans
The main effect of the crisis on loan transactions to date is that both lenders and borrowers are paying more
attention to counterparty and credit risk issues. Lenders are focusing on the nationality and the location of the
assets of borrowers and credit support providers.
In a number of transactions, the appropriate way to define “euro” in a loan agreement is being discussed, but as
noted above, if a definition is adopted it tends to be of the “vanilla” variety, not a more tailored definition that
contemplates euro fragmentation expressly. Such discussions in a number of cases have been prompted by the
LMA, which in January added a footnote to each of its recommended forms of Facility Agreement reminding users
that the documents do not contain currency definitions.
In a small number of cases, we have seen some other provisions aimed at euro exit risk being discussed, in
particular, Events of Default tailored to eurozone exit and currency switching provisions (i.e. fallback currency
provisions which are triggered upon the occurrence of a particular event). However, it is usually difficult to reach
consensus on provisions which are acceptable to all parties (in syndicated deals lenders’ views may diverge and the
borrower will generally have a different perspective to the lenders in any event).
The impact of the crisis on loan terms is considered further in Part 4.
Bonds
ICMA held a briefing call for members on eurozone crisis contingency planning on May 25, during which the panel
indicated that there is little evidence of changes to bond documentation as a result of the crisis.
We would agree that there has been minimal pressure to date in the euromarkets to make changes to terms and
conditions to address issues arising out of the crisis.
The only real development that we have noted is that a limited number of prospectuses have included specific risk
factors relating to the crisis (see further section 3.8 below).
6
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Derivatives
In the derivatives market, we have noted limited movement in contractual terms to date, notwithstanding ISDA’s
“Eurozone Contingency Planning Update” of 25 May, which advises due diligence and contingency planning, and
outlines ISDA’s likely approach should the crisis lead to euro exit or euro break-up.
The update is available on ISDA’s website7. It states that ISDA does not intend to publish standard disruption or
termination clauses in advance of an event occurring, although it reminds market participants that they are, of
course, free to agree on provisions bilaterally.
The update goes on to highlight some high level redenomination risk factors (location of the parties, governing law,
jurisdiction, place of payment) and the definition of “euro” which is already in the ISDA definitions suite.
In terms of the likely economic impact on transactions, ISDA emphasises that each type of contract will give rise
to its own issues in a redenomination scenario and recommends that market participants review their outstanding
OTC contracts to identify the issues, “and to take steps now, possibly including renegotiating, closing out or rebooking transactions” to avoid them. Parties are also reminded to ascertain which fallback provisions have been
selected and how they would operate in particular scenarios (noting that ISDA’s existing disruption provisions were
not drafted to cover eurozone exit and are unlikely to be triggered).
The update also indicated ISDA’s intention to produce a protocol to enable the incorporation of the 2002 Illegality/
Force Majeure mechanics into 1992 Master Agreements, which was published on July 11.
The Illegality/Force Majeure protocol has been produced because the illegality Termination Event in the 2002 ISDA
Master Agreement operates in a slightly more favourable manner from the point of view of the party which is not
affected by the illegality, compared to the equivalent provision in the 1992 Master Agreement. In addition, the
2002 Master Agreement contains a force majeure Termination Event, which is not included in the 1992 template.
As a result, there is a view that the 2002 mechanics might better assist parties to ISDA Master Agreements in
dealing with issues arising out of a euro exit (for example, the imposition of capital controls which could make it
illegal for parties in the exiting country to make payments in euro).
The 2002 illegality Termination Event, in the same way as the 1992 provision, operates if it becomes unlawful for a
party to perform its payment or delivery obligations or to comply with a material provision of the agreement. The
main difference between the two provisions is that the 2002 illegality Termination Event is subject to the operation
of any disruption fallback or remedy provisions and the expiry of a waiting period, aimed at limiting the likelihood
that transactions will be prematurely or unnecessarily closed out in circumstances where the illegality can be
managed such that the transactions can continue.
In addition, under the 2002 formulation:
7
http://www2.isda.org/functional-areas/legal-and-documentation/eurozone-contingency-planning/.
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•
the party whose obligations have become unlawful (the Affected Party) is not obliged to try and transfer the
trade to another office before relying on the illegality Termination Event (as is the case under 1992 provision);
•
the Affected Party’s termination rights are more limited in that it only has the right to terminate transactions if
the non-affected party has given notice of termination in respect of less than all of the affected transactions (in
which case it is able to terminate all or any of the remaining transactions); and
•
the illegality provision is anticipatory and thus broader in effect – the ISDA User Guide notes that it may be
triggered if it would be unlawful to perform the obligations on the date the illegality occurs, even if there are
not any obligations then due on that date.
The force majeure Termination Event in the 2002 ISDA Master Agreement operates in a similar manner to the 2002
illegality Termination Event, and, in summary, subject to any fallback provisions and a waiting period, permits the
transaction to be terminated if a force majeure or “act of state” beyond the control of the relevant party prevents
the office through which the transaction is to be performed from fulfilling its payment or delivery obligations or
from complying with other material provisions.
It may be the case that the illegality/force majeure provisions of the 2002 Master Agreement provide increased
protection for non-affected parties (due to their broader coverage, anticipatory nature and enhanced termination
rights). However, parties to 1992 ISDA Master Agreements will need to consider whether they wish to take
advantage of the new protocol. The protocol operates in the same way as previous ISDA protocols, and will only
be binding in relation to Master Agreements between parties which have both agreed to adhere to it.
Further information on various topics is expected from ISDA. According to the “Contingency Planning Update”,
ISDA plans to produce a note on the impact on derivatives of capital and exchange controls and has also taken
advice on the issues likely to arise in relation to particular types of asset, which are being published as they are
finalised on the ISDA members’ portal.
3.7What is happening in practice – financial reports
Companies must consider whether it is necessary to make reference to the ongoing difficulties in the eurozone,
their impact on the business and the steps the business is taking to address those issues in annual and interim
reports. In part prompted by two updates for directors published by the Financial Reporting Council (“FRC”), a
significant number of FTSE 100 and FTSE 250 companies have now incorporated disclosures relating to risks arising
out of the crisis into their public reports. Disclosures vary in nature (as is to be expected) according to the risks
facing the relevant business.
The FRC published its first update for directors of listed companies in January. It draws attention to the importance
of conveying a “balanced and understandable assessment of a company’s position and prospects in the context of
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increased country and currency risk”8. The update highlights, among other things, the need to consider whether
enhanced disclosures are required in the light of companies’ various legal and regulatory obligations (under the
Companies Act 2006, the Listing Rules and accounting standards) to make disclosures in annual and interim
reports with regard to the position and prospects of the business, its viability as a going concern and the principal
risks and uncertainties facing it.
In the FRC’s view, where a company is significantly exposed to increased country and currency risks, directors may
need to enhance their disclosures in this area, including in relation to how these risks are to be mitigated. The
FRC update provides examples of the types of disclosure required, highlighting that a company that has significant
balances outstanding or business relationships with the public sector in a country that is in severe financial
difficulties (and/or which is implementing austerity measures) will likely need to disclose this and provide details of
future events that could affect amounts outstanding and trading volumes.
The FRC summarises the matters which directors might consider, where relevant, as follows:
•
the company’s direct, or to the extent practical, indirect exposure to country risk, not only through financial
instruments but also in terms of exposure to trading counterparties (customers and suppliers);
•
the impact of austerity measures being adopted in a number of countries on the company’s forecasts,
impairment testing and going concern considerations;
•
possible consequences of currency events that are not factored into forecasts but may have an impact on
reported exposures and sensitivity testing of impairment or going concern considerations; and
•
post-balance sheet date events requiring enhanced disclosures to avoid misleading investors.
The FRC update also includes guidance in relation to the potential impairment of financial and non-financial assets
and disclosures concerning concentration risk and the risk of change in carrying amounts of assets and liabilities.
More recently, on June 18 2012, prompted by the continuing economic uncertainty in the eurozone, the FRC
published a further update9, focusing on disclosures in interim reports. The June update reiterates a number of
points made in the earlier update and reminds directors that it is important to tailor disclosures to the risks facing
the relevant company and avoid boilerplate. The June update also states that notwithstanding the different sources
of disclosure obligation, it may assist investors if all disclosures on this topic are included in one section of the
interim report, so that the effects and risks of the current uncertainties can be more easily understood.
Clearly the appropriate level of contingency planning needs to have been undertaken in order to determine
whether disclosures in financial reports are required.
8
9
http://www.frc.org.uk/images/uploaded/documents/Update%20for%20Directors%20Jan%2012%20FINAL.pdf
http://www.frc.org.uk/images/uploaded/documents/Update%20for%20directors%20June%2020121.pdf
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3.8What is happening in practice – prospectus risk factors
Disclosures relating to risks arising out of the crisis are also a relevant consideration in public equity and debt
issuance documentation.
Most debt issuance (including MTN programme) documentation currently in the market contains only broad and generic
eurozone risk factors relating to the weakened economic outlook although there are some signs of a trend towards
more detailed disclosure.
A limited number of public debt issue prospectuses have included reasonably detailed risk factors relating to the
financial crisis and the eurozone crisis. Issues covered include:
•
market volatility;
•
the potential for sovereign defaults, sovereign debt restructuring and/or bank failure;
•
increased funding costs;
•
credit and capital market volatility;
•
the potential consequences of euro exit including:
−− impact on contracts;
−− market dislocation;
−− ratings downgrades;
−− capital and exchange controls;
−− insolvency proceedings; and
−− asset/liability mismatch issues including hedging.
Such detailed risk factors have been seen to date largely in relation to financial institution offerings and corporate
debt offerings into the US (which in general would tend to incorporate more fulsome risk factors in any event).
Accordingly, developments in this area are probably not representative of a move in market practice but rather
of the vulnerability of particular businesses to aspects of the eurozone crisis. The same observation applies to the
equity market. Although disclosures related to this topic have appeared in some recent equity prospectuses, the
nature and level of disclosure varies.
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4.Impact on financing
4.1 Conditions in the loan market
For many corporates, loan finance (and in particular, revolving credit facilities) are a key part of their funding and
liquidity arrangements. The effect of the sovereign debt crisis on the loan market has been apparent for some time:
•
Capacity has been decreasing since 2008. Recapitalisation and deleveraging measures are ongoing at many EU
(and global) banks against the backdrop of rating downgrades and volatile financial markets.
•
There is evidence of a fragmentation of the loan market along geographic lines: some EU banks are retreating
to their domestic markets and are open for new business only for local borrowers.
•
Although the ECB’s two long-term refinancing operations (“LTRO”) were widely perceived as reasonably
successful in improving liquidity, at least for a period, conditions in the wholesale funding markets have been
difficult in the interim, putting pressure on banks’ funding costs, in particular for those banks in or heavily
exposed to the weaker EMSs.
•
Some eurozone banks are experiencing difficulties in funding in particular currencies, in particular US dollars,
resulting in sales of US$ portfolios and reports of redenomination and/or pricing premia being attached to US$
loan facilities in Europe.
•
Some non-EU banks are reluctant to increase their lending exposure to the eurozone.
All of these difficulties have arisen at a time when operational costs in the financial sector are increasing in any
event, due to the after-effects of the 2007-9 financial crisis and the imminent implementation of Basel III and other
regulatory reforms.
The impact of increasing regulatory costs is second only to eurozone issues on the loan market’s worry-list.
Basel III will affect the capacity of the loan market (as a result of capital pressures) and the availability of certain
products. The pricing of backstop facilities is a particular concern for European corporates as a result of the adverse
treatment of liquidity facilities under the new Basel III and CRD IV liquidity rules10. More generally, for non-financial
10
For background information on this topic, please refer to our August 2011 Financing Briefing,
“The Basel III liquidity coverage ratio : implications for corporate borrowers”, available from
http://www.slaughterandmay.com/what-we-do/publications-and-seminars/client-publications-and-articles.aspx.
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corporates there is uncertainty, or at least a lack of transparency, as to the precise impact of Basel III on their loan
financing arrangements (discussed further below).
It is possible that the ECB and/or national authorities will take further steps to mitigate the adverse impact of the
eurozone crisis, coupled with other pre-existing pressures on the credit markets. However, the availability of a third
round of LTRO, for example, and the impact of any such intervention (how banks decide to use any funds that are
made available) cannot be reliably predicted.
4.2Impact on existing loan facilities
Faced with a potentially challenging financing environment, it is important for treasury departments to ensure that
they know the group’s loan documentation intimately. It is worth avoiding a default (even a “technical” one) if at
all possible.
The experience of the 2007-9 crisis indicates that lenders may display little flexibility in granting waivers at a time
when they are trying to de-lever and de-risk their own balance sheets. In some cases, banks are withdrawing from
particular sectors. Further, even if the requested waiver is granted, changes to loan terms, for example, now almost
invariably attract fees and may lead to quid pro quo renegotiations of other aspects of the documentation.
Corporate borrowers should therefore try to anticipate problems which potentially lie ahead. For example:
•
Monitor compliance closely
Monitor the representations, covenants and Events of Default. In particular:
−− review the financial covenant definitions, check the calculations against those definitions and ensure that
compliance certificates are based on correct calculations; and
−− consider the scope and impact of cross-default/cross-acceleration provisions. Does a breach of particular
financing terms impact (i) other financing terms and (ii) any other commercial arrangements?
•
When are the financial covenants tested?
When is the next covenant test? Is there any doubt about the obligor group’s ability to meet a forthcoming
covenant test? Is there any scope to “cure” a potential breach in advance of the next covenant test date?
For example, for some companies, currency fluctuation may affect leverage calculations. For others, a decline
in property values (and in due course, declining earnings) may put pressure on net asset covenants, loan to
value ratios and gearing covenants.
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•
Who might I be negotiating with?
In relation to loan facilities it will be important to seek to identify the lenders as far as possible. Consider, for
example, to what extent are transfers restricted, whether counterparty risk is a concern, what are the borrower’s
rights if a lender should default or become insolvent, how do the market disruption provisions operate?
•
Is there any impact on the going concern statement?
Consider and anticipate (if applicable) any issues with obtaining a going concern statement at the year end in
the absence of a waiver or renegotiation of the company’s facilities.
4.3Refinancing options
Be prepared
It is particularly important that corporate borrowers with major facilities maturing in the next few years start to
consider their refinancing options as early as possible. All types of financing may require longer lead times to
arrange than might have historically been the case.
Uncertainty in the financial markets may be a concern in particular for those borrowers who rely on banks to
provide undrawn or amortising debt. For those dependent on loan financing, it is important to engage and presound relationship banks well in advance. Since 2008, bank refinancing discussions 12 to 18 months in advance of
the maturity date have not been uncommon.
Amend and extend
Significant numbers of borrowers have opted to “amend and extend” existing loan facilities rather than embark
on a full refinancing. This is the case in particular for leveraged credits; some $33.4 billion of leveraged loans were
amended and extended during 2011, in part due to the difficulties of refinancing in the high yield bond market
during the second half of 2011 (see further below). Amend and extend (as the name suggests) usually involves
the payment of fees in exchange for an extension to the maturity of existing facilities, which may or may not be
accompanied by amendments to other terms (e.g. a covenant re-set).
The difficulty is that an “amend and extend” will usually require the consent of all lenders (extensions to the
maturity date of LMA-based facilities are almost always one of the changes which are reserved to a unanimous
vote). There are alternative routes which do not require unanimity, which have been invoked by some leveraged
borrowers to similar effect, notably the possibility of adding an additional or “hollow tranche” into which existing
lenders roll their commitments, but the availability of these types of structures is highly dependent on the precise
terms of the existing documentation.
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Forward starts
Outside the leveraged space, there is less call to navigate contractual restrictions on new financial indebtedness,
security and guarantee packages and inter-creditor rights. As a result, for some credits, in particular perhaps those
at the lower end of investment grade or in the cross-over bracket, “forward start” terms may offer an alternative to
a full refinancing or an amend and extend.
The “forward start” structure became popular in late 2008 and 2009, but disappeared during 2010/early 2011 as
financing conditions improved. Since summer 2011 the structure has begun to re-emerge, illustrating the level of
refinancing risk that is perceived in the market.
Forward starts are typically negotiated 12 to 24 months prior to the maturity of the original facility (although that
may not always be the case). The forward start does not replace the original facility, which stays in place, but is a
new facility which co-exists with the original facility. The original facility remains in place up to its maturity and the
“forward start” becomes available for drawdown on the maturity date of the original facility. The forward start is
on similar terms to the existing facility, but with revised pricing and a maturity date falling after that of the original
facility. Typically all existing lenders are invited to sign up: lenders then choose to either extend their commitments
or keep their existing commitments until maturity.
From the borrower’s perspective, the advantage of a forward start facility is certainty in an uncertain market.
The structure effectively results in a binding agreement on refinancing terms without all of the cost and risk of a
full-scale refinancing, in exchange for accelerating the price increase. In addition, forward starts generally enable
borrowers to maintain their covenant package at existing levels, whereas it is possible that covenants would be
tightened on an amend and extend or a full refinancing (although that is not always the case). Further, it is thought
that there is a higher likelihood that lenders will commit to a forward-start rather than a full refinancing in a market
where prices have risen, because using a forward-start structure provides them with an exit option in the form of
a sellable, re-priced asset; their alternative being to hold on to an underpriced asset. Forward starts may also help
borrowers identify their key banking relationships, and there is a view that negotiating with existing lenders lends
traction to price negotiations that may work to the borrower’s advantage.
Not all lenders, however, may be willing or able to make predictions about future pricing. The availability of
forward start terms may also depend on whether the borrower is able to shoulder additional interest and fee costs
without breaching covenant ratios (or other covenant restrictions) under existing facilities. An obvious downside to
these types of structure is facility shrinkage if the required level of lenders do not sign up. However, there are ways
to mitigate shrinkage risk. During the previous cycle, for example, we saw some forward starts with “accordion”
features, which enabled borrowers to ask lenders to increase their commitments (up to a cap) or bring new lenders
into the forward start before the beginning of the availability period.
Bilaterals
A further structural option for loan financing requirements that some investment grade corporates might consider
is reverting to bilateral loans in preference to syndicated loan arrangements. Bilaterals are perceived by some as
a means of putting pressure on lenders to improve terms. This approach can be successful for stronger credits,
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although in some cases, in particular where syndicated loan arrangements are collapsed into bilaterals, lenders may
look for “most favoured nation” protection to ensure that they continue to enjoy the same rights as other creditors.
4.4Loan terms for new facilities
What are lenders looking for?
Economic conditions in the eurozone are one of a number of factors putting pressure on the financial sector.
Accordingly, it is difficult to make observations about the impact of the eurozone crisis to date on loan terms in
isolation. Lenders have generally been taking a more conservative approach to loan structures and documentation
since 2007/8.
For example, specific developments which we have noted relating to pricing and yield in facilities documented
during 2012 include:
•
significant differentiations in pricing based on geographic lines (more expensive loans to borrowers in the
weaker EMSs);
•
the greater prominence of pricing linked to a ratings grid, even for high quality credits;
•
increased focus on the terms and fees applicable to standby facilities, notably, the increasing emergence of
“first draw” fees;
•
some discussions around alternatives to LIBOR and spread protection for banks (although we have not seen
these alternatives in documented deals to date other than LIBOR floors and Original Issue Discount protection
in the leveraged market); and
•
renewed focus on flex rights in syndicated deals, in particular in the leveraged market.
Some of these changes may be indicative of a general desire from some lenders to move away from the traditional
relationship pricing applied to loans, at least other than for top-end borrowers. Others might be attributed
more directly to the impact of the increasing costs of complying with the regulatory capital and liquidity regime.
However, more recently (and for those to whom loan finance is available) pricing and maturities seem to have
tightened further in certain sectors, which can at least in part be attributed to the difficulties in the eurozone.
Changes to pricing structures and maturities seem to be the main areas of movement. In general terms we
have not noted any significant changes to covenant packages, although in individual cases, crossover credits and
borrowers at the lower end of the investment grade spectrum in particular may find that lenders may look for
tighter restrictions than might have been the case a couple of years ago.
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What else should borrowers focus on?
The impact of regulatory change continues to be the subject of discussion in most loan transactions, specifically
the finance parties’ ability to pass the costs of Basel III and related costs to the borrower via the increased costs
indemnity.
To date, borrowers who have sought to exclude the costs of Basel III, the US Dodd-Frank Act and other recent
regulatory changes (e.g. the various bank levies) from the scope of the increased costs clause have often met with
strong resistance from lenders. Previous market practice with regard to significant regulatory change (e.g. Basel
II) has been to exclude the possibility of increased costs claims pending implementation once the regulations in
question have been published and digested by lenders. The first implementation date for Basel III is now very close,
hence, it is hoped that lenders will be able to provide more certainty to borrowers with regard to the potential for
increased costs claims. This is certainly a topic which borrowers should continue to discuss with lenders.
Other documentation issues which borrowers might wish to focus on in the context of the eurozone crisis
specifically include:
•
Defaulting Lender provisions: The bulk of the LMA’s “Finance Party Default and Market Disruption”
provisions are now in reasonably common usage, despite not forming part and parcel of the LMA’s investment
grade templates. These provisions contain a variety of options for dealing with defaulting and/or insolvent
finance parties (for example, rights to cancel their commitments or transfer them to a new lender, rights
to term-out existing revolving facility drawings, provision for the cessation of commitment fees and voting
disenfranchisement). While it is acknowledged that such provisions are perhaps most likely to be triggered in
circumstances where the banking sector generally is under stress (in which case alternative sources of finance
may be limited), they may afford some measure of protection against a deterioration in a lender’s financial
position to borrowers with undrawn or revolving facilities.
•
Transfer provisions: Restrictions on the transfer of lenders’ participations provide the borrower with an
important means of mitigating counterparty risk and enable the borrower to remain aware of and maintain
relationships with its lender group. In our experience, there has been no significant change in the ability of
borrowers to achieve certain restrictions on the freedom of lenders to transfer syndicated loan participations
since the onset of the crisis. In the investment grade market, consent rights along the lines described in the
LMA agreements are still commonly included.
•
Reference interest rates and market disruption provisions: Market disruption provisions are incorporated
into most syndicated loans, and (when triggered), entitle lenders to pass their actual funding costs onto the
borrower in place of the agreed reference interest rate (e.g. LIBOR). In an environment where funding costs
may be increasing, which in turn is impacting the margins borrowers are being asked to pay, clearly there is
value in ensuring the barrier for invoking these provisions is set at an appropriate level.
•
Euro exit-related provisions: As noted in Part 3, we have observed discussions in some transactions as to the
appropriate way to define “euro” in a loan agreement, but in general, practice has yet to develop in relation
to provisions more specifically aimed at addressing particular eurozone risk factors. This is a topic which
borrowers should continue to monitor.
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4.5Non-bank lending
If conditions in the loan market are difficult, borrowers will continue to seek alternative sources of funding,
especially for term debt. This may mean more widespread use of asset financing techniques such as factoring,
inventory or supply chain financing, or direct loans from non-bank providers, via either the private placement
market or a specialist provider such as the Prudential/M&G UK Companies Financing Fund11. It may also mean that
heavier reliance is placed on capital markets financing. The availability of bond finance and the nature of private
placement options are discussed in more detail below.
For borrowers with ratings, the capital markets can present a cost-effective alternative to loans, but capital markets
financing is subject to availability. Over the past couple of years, there have been some astonishingly successful
and busy periods but conditions have been extremely volatile. Success depends on the identity of the issuer, the
terms of the issue and very careful timing. Thus in many cases, it will be important for borrowers planning to
raise bond financing to have ready a “plan B” in case the issue has to be postponed or abandoned; for example,
an extension option if event-driven bridge financing is in place, or an amend and extend package if the bond is
intended to refinance existing bank debt.
The leveraged loan market has made full use of capital markets issues to pick up the diminution in loan market
capacity. A mixture of loans and bonds is required to finance larger deals meaning that leveraged issuers have had
to look at products to fill the funding gap when the high yield markets are shut. “Plan B” for some leveraged credits
has been to raise loan finance in the more liquid US market. A few European issuers who have US exposure and are
thus able to manage the currency risk have been able to raise funds more cheaply and on more favourable terms
than would have been the case in Europe, even taking into account the costs of swapping their US dollars back
into euro. Closer to home, mezzanine loans, the traditional source of subordinated debt in the European leveraged
loan market, which faded away in the wake of the post-Lehman wave of restructurings, have returned to a limited
extent, albeit in re-priced form.
An alternative source of funding which is proving increasingly attractive to European corporate treasurers is the US
private placement (“USPP”) market, where US insurance companies, pension funds and other investors make debt
financing available to US and non-US companies. USPP lending to European borrowers now represents a sizeable
proportion of the market12.
A USPP often involves an offer of unlisted registered notes to a single investor, or a small club of investors or
syndicate arranged by an investment bank offering agent. The notes are normally issued with a fixed coupon in
US dollars (although sterling and euro issues are possible). The market allows for significant flexibility in issue size
(from as little as $20 million to as much as $1.5 billion for very strong borrowers) and maturities can range from
3 years to as long as 15 years. In addition to standalone issuances, some USPP investors also offer to provide an
uncommitted programme enabling multiple issuances.
11
12
This fund was established in 2008 to provide fixed rate funding of up to around £100m to UK issuers as an alternative to banks. The fund offers 5-10 year
debt finance to mid-sized corporates and has made a number of investments to date.
In 2011, according to reports, UK borrowers alone accounted for 20% of total USPP borrowings, with other European borrowers making up a further 17%.
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The notes are documented based on a model form note purchase agreement (“NPA”) maintained by the American
College of Investment Counsel. The representations and covenants required of the borrower in these NPAs are
much more extensive than would normally be found in a eurobond, but are not dissimilar to the sorts of protection
offered in LMA-based facility agreements. Accordingly, in general, European borrowers manage to negotiate the
incorporation of a covenant package which is broadly consistent with their existing bank facilities.
The main disadvantages of USPP are the potential (but not insurmountable) difficulties in negotiating amendments
and waivers and the buy-to-hold nature of the USPP investors, which can lessen the borrower’s flexibility should it
subsequently wish to make early repayment.
4.6Checklist for corporate treasurers
Clearly some credits are likely to be affected more than others if conditions deteriorate (a repeat of the “flight
to quality” and increased focus on ancillary business seen in 2009). However, there is some evidence of adverse
movement in loan pricing and terms at all points in the ratings scale. Now that in some EMSs (most recently, in
Spain), pressure on the financial sector has tipped into a full blown banking crisis, it would seem prudent for all
corporate borrowers to anticipate that banks’ lending capacity might be further inhibited, the upward pressure
on loan pricing that began to intensify during 2011 may continue into 2013 and that the eurozone crisis could
potentially lead to a second liquidity or credit crunch.
The marginally positive aspect is that the “crisis toolkit” developed following the global financial crisis is still
relatively fresh in the minds of many borrowers, making them reasonably well-placed to anticipate what banks are
likely to require and what alternative options are available.
For further information, we would refer you to the ACT’s contingency planning checklist for corporate treasurers
anticipating a downturn in the economy, first published in 2008, which is available from their website13.
13
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5.Impact on M&A
5.1 Opportunities
For some, the eurozone crisis may be a source of opportunity, as entities across the EU, for example, financial
institutions and sovereigns, seek to dispose of assets as a result of problems rooted in the global financial crisis and
exacerbated by the difficulties in the eurozone.
Buyers are likely to have concerns about acquiring eurozone targets in particular in the current environment. It
is prudent to take a cautious approach, but in many cases, provided the potential impact of the crisis on the
transaction is properly assessed and factored into the pricing and the structure of the transaction, concerns can be
alleviated.
It is likely to be particularly important, for example, to invest in a thorough due diligence exercise, which, in
addition to the usual areas of enquiry, includes an assessment of the extent to which potentially worsening
economic conditions in relevant EU countries could affect the future prospects of the target group or the valuation
of the assets being purchased. Some of the key issues that might warrant attention in due diligence and when
structuring transactions are outlined below.
5.2Due diligence
Country risk
It is appropriate to consider the scope of the target group’s exposure to the weaker EMSs where economic
conditions are likely to be particularly testing.
For example:
•
Is the target exposed to government entities in the weaker eurozone states?
Does it contract with government or public sector entities, or have the benefit of government subsidies or tax
concessions?
•
Who are the target’s bankers?
Is it exposed to or reliant on any of the more vulnerable EU banks?
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•
Where are its key customers and suppliers located?
If they are in an “at risk” jurisdiction, what are the target’s rights in the event of non-performance and breach of
contract (for example, credit support such as guarantees and security and termination rights)?
•
What alternative sources of supply/custom might be available to the target if required?
Refinancing risk
As discussed in Part 4, the most immediate knock-on effect of financial difficulties at state level is on the banking
sector and the viability of certain banks as well as the availability of credit for business in the EU is an important
area of enquiry.
Most due diligence exercises will involve a review of the terms of the target group’s financing arrangements to
determine the extent of the target’s post-acquisition refinancing needs, because the financing arrangements of
many EU companies are terminable upon a change of control. However, this is not always the case, for example,
where the investment comprises only a minority stake, and even where refinancing is required, there may be good
reasons to continue relationships with local banks and other existing sources of funds.
From a buyer’s perspective, it will therefore be important to consider at an early stage in the transaction how the
group’s financing requirements will be met after completion.
For example:
•
In which country or countries are the target group’s banking relationships and with which banks?
•
Is the target group exposed to any of the more vulnerable eurozone banks? Do the terms of its financing
arrangements protect it against the risk of bank default?
•
Will the target’s debt financing continue beyond completion, and if so, for how long?
•
What are the target’s future funding requirements?
•
What sources of finance are likely to be available to the target group post-completion (e.g. bank loans, bonds,
private placements, equity issues, other)?
Currency risk
Potential buyers interested in a business with EU cashflows may think it appropriate to consider the likely impact of
euro break-up or euro exit on the target group’s material contractual rights and obligations in euro (including euro
bank deposits).
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Due diligence enquiries on this topic will need to be tailored to the concerns of the purchaser and the nature
of the business. It will be important to identify both the scope of the review (e.g. a materiality threshold) and
the particular contingencies of concern (e.g. Greek default and euro exit). Information should also be sought on
whether the target group itself has undertaken any contingency planning for euro exit or break-up and, if so, the
nature of that exercise and its conclusions.
5.3Completion risk
Conditions in the financial markets and economic conditions can change very quickly. If, therefore, there is to be a
gap between the signing and completion of an acquisition, it will be important for the purchaser to seek to protect
itself against worsening conditions.
For example:
•
Consider a MAC or force majeure condition which is tailored to particular changes in market conditions, for
example, EU member state default or euro exit or break-up. In this regard, attempts may be made to limit
the customary exclusion from MAC conditions of “changes in stock markets, interest rates, exchange rates,
commodity prices or other general economic conditions”.
•
Conditions to completion can also be crafted to address risks specific to the relevant business, for example, the
continuance of certain important customer and/or supplier relationships or credit lines.
It should be noted that there may be regulatory constraints on the nature of the conditions that can be imposed (in
particular where the target is a public company), although in general, there are options open to bidders to deal with
any issues that arise.
5.4Valuation risk
The most significant concern of buyers who invest in an unpredictable environment will be to protect their
valuation. It may be possible, of course, to take into account the extent and likelihood of any risks posed to the
relevant target group by the eurozone crisis by building a risk discount into the purchase price for the relevant asset.
However, whether this is possible depends, among other things, on the dynamic between buyer and seller and
the presence of any rival acquirors. Therefore it may also be worthwhile to consider ways to address risks arising
out of the eurozone crisis (including any specific risks identified in the course of due diligence) in the contractual
documentation.
For example, it is common in acquisition documentation to make provision for adjustments to the purchase price
based on certain contingencies. This may be by means of warranties and indemnities covering particular aspects of
the business, or a completion accounts mechanic. A device which may be particularly appropriate in circumstances
where there are concerns about the future profitability of a business, is an “earn-out” provision. An “earn-out”
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involves the purchase price being adjusted between buyer and seller by reference to the performance of the target
group after completion.
The value of any contractual purchase price adjustment depends on the seller’s ability to meet claims. There are
many ways in which concerns about the creditworthiness of the seller or other counterparty might be dealt with.
For example, a portion of the consideration may be deferred and/or placed in escrow to secure warranty and
indemnity claims or an earn-out. Alternatively (or in addition), the seller could be asked to provide a letter of credit
or bank guarantees in support of its obligations (from a provider acceptable to both parties).
This is another area where there is no “one size fits all” solution. Ideally legal advice should be sought as early as
possible in the transaction with regard to the most suitable options in the circumstances.
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6.Concluding remarks
The intention of this memorandum is to highlight some of the key risk areas that we as lawyers believe might
arise out of the potential scenarios and outcomes of the eurozone crisis. Some (such as redenomination risk) are
relevant only if the euro fragments. Other risks, such as a contraction in liquidity in the financing markets and
the prospect of worsening counterparty credit quality may be relevant regardless of what happens to the single
currency.
The likelihood of any of these risks materialising, and the length of time during which their after-effects might be
felt, is dependent on the ability of EU leaders to reassure investors in sovereigns and in banks that adequate steps
are being taken to improve the financial position of weaker governments and institutions and, in particular, that
stabilisation funds are available in sufficient quantities should they be further required.
Although there have recently been some indications of more positive sentiment in the eurozone, the outlook
remains uncertain. For example, the ability of Greece, among others, to implement the required austerity measures
seems debatable, it is not clear whether the existing eurozone “firewall” or bailout funds (the European Financial
Stability Facility and its intended successor, the European Stability Mechanism) will need to be increased or
extended further and the likelihood of political consensus in the short to medium term on more far-reaching steps
towards resolving the crisis, such as communally-backed eurozone bonds seems slim.
As a result, we think that at this point it remains important for businesses with material exposure to the
eurozone to be prepared. This involves devoting a sensible amount of resources to contingency planning and risk
management for those potential outcomes of the eurozone crisis which are most likely to affect their operations
and financial position.
We would expect this to be the case until stability returns.
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Appendix – Sample legal due diligence checklist
This checklist is included by way of example to illustrate the sorts of issues that in-house legal and business teams
tasked with assessing the impact on contracts of euro exit or euro break-up might be advised to look for and analyse.
It outlines what, in our view, are likely to be the key risk factors in most circumstances. Additional considerations may
arise as a result of the factual scenario and specific issues may be relevant to particular types of contract.
REDENOMINATION
Risk factor
Explanation
Governing law
It is expected that contracts in euro governed by the law of the exiting EMS (expressly
or by implication) would be redenominated to the extent within the scope of its new
monetary law and that the new monetary law would, in most circumstances, be
enforced by an English court as part of the governing law of the contract.
Jurisdiction
It is expected that before the courts of the exiting EMS, its new monetary laws would
be treated as part of the mandatory laws of the forum, and thus might operate to
redenominate contracts of a type within their scope regardless of the governing law of
the contract.
Intention of the
parties
An English law contract will be redenominated if, based on a proper construction of
the contract, the parties intended to contract by reference to the lex monetae of the
exiting EMS as opposed to maintaining the euro.
It is important to analyse whether the contract includes provisions which might be
invoked as evidence that the parties intended to retain the euro as the currency of
account notwithstanding euro exit or break-up. The argument that “euro means euro”
may be more persuasive, for example, where the contract contains a definition of
euro, an express choice of the currency of account or other provisions predicated on
payments in euro, for example, EURIBOR interest.
Country with
which the contract
is most closely
connected
50
In the absence of provisions which indicate an intention to keep the euro, an English
court might determine that the parties intended to contract by reference to the
monetary law of the relevant EMS, if the court is able to conclude that the exiting
EMS is the country with which the contract is most closely connected. In assessing
the extent of the connection of a contract to a particular country, it may be helpful
to keep in mind the question: if this contract had been entered into prior to the
introduction of the euro, what would the currency of the contract have been?
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CAPITAL AND EXCHANGE CONTROLS
Risk factor
Explanation
Governing law
It is unlikely that an English court would enforce a contract governed by the law of
a country which has imposed capital and exchange controls (the “Imposing State”)
which prevent or restrict performance.
Jurisdiction
It is to be expected that the courts of the Imposing State will treat the controls as
mandatory laws of the forum and will not enforce contracts in breach of such controls
regardless of the governing law of the contract.
Place of
performance/
payment and
location of
counterparty
Following euro exit, faced with a contract governed by English law but to be performed
(or partly performed) in the exiting EMS, an English court would have regard to the
laws of that EMS with regard to the manner of performance. If performance in euro
had become illegal as a matter of the law of that EMS (e.g. by virtue of capital or
exchange controls), the obligation would be unenforceable in euro before an English
court.
Under English law, the place of performance is the place where the creditor is entitled
to receive his money.
“Exchange
contracts”
“Exchange contracts” within the meaning of the IMF Agreement are unenforceable
before the courts of an IMF member. English law construes this concept narrowly.
If the contract is governed by English law, the question is whether the contract is
concerned with the exchange of currency.
The laws of other jurisdictions construe the concept more broadly. If the contract
is governed by foreign law, consider whether to investigate the approach of the
chosen law/forum to the recognition of exchange and capital controls under the IMF
Agreement (i.e. whether a “broad” or “narrow” approach prevails).
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PERFORMANCE/ENFORCEMENT
Issues to consider
Explanation
How would the
terms of the
contract operate
in the assumed
scenario?
The express terms and circumstances of each exposure should be noted to determine
whether they include generic terms which may operate or be relevant in the assumed
scenario.
Frustration
Terms to consider might include, for example:
•
Currency and payment provisions
•
Costs indemnities
•
Set-off rights
•
Rights excusing further performance
•
Amendment/variation rights
•
Illegality/MAC/force majeure provisions
•
Enforcement/termination rights
•
Rights upon counterparty default/insolvency
If the contract does not provide for the consequences of the assumed scenario, it may
be necessary to consider the consequences under the general law.
In relation to an English law contract, the key questions are:
52
•
Has the contract become illegal or incapable of performance?
•
Has the obligation to perform been transformed into something “radically
different” from that undertaken at the moment of entry into the contract?
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A Practical Guide to Contingency Planning and Legal Risk Management
PERFORMANCE/ENFORCEMENT
Issues to consider
Explanation
Impact on related
exposures
It is important to identify exposures related to or dependent on a contract which is
considered to be at risk of disruption/redenomination, which themselves may or may
not be at risk of disruption. Consider for example:
Ability to enforce
judgments/
enforcement
strategy
•
Impact on credit support arrangements
•
Cross-default triggers
•
Possibility of asset/liability mismatch
An enforceable contract may be of little practical assistance to the creditor if the
debtor nonetheless a) decides to comply with the applicable laws of his home
jurisdiction and b) thus fails to perform (or perform in the manner required by the
contract) where the domestic restrictions which inhibit his performance also prevent
the creditor from enforcing a foreign judgment against the creditor in its home
jurisdiction.
A claimant’s ability to recoup its loss depends not only on whether the contract
is enforceable, but on whether the defendant has assets in a jurisdiction that will
recognise the judgment obtained.
It would be surprising, for example, if the courts of a country imposing exchange
controls were to recognise a judgment in euro given by e.g. the English courts in
breach of such controls.
The nationality of the debtor, the location of its assets and the manner in which
enforcement action might proceed are all relevant considerations.
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Further Information
slaughter and may contacts
Slaughter and May’s eurozone crisis and sovereign debt team consists of a group of practitioners across different
practice areas. The team is considering the issues as part of a network of lawyers from the leading independent
firms in major jurisdictions.
If you would like to discuss the issues raised in this memorandum, please contact one of the following or your usual
Slaughter and May contact:
Charles Randell:
[email protected]
Elizabeth Barrett:
[email protected]
Ian Johnson:
[email protected]
Andrew McClean:
[email protected]
Sanjev Warna-kula-suriya:
[email protected]
Stephen Powell:
[email protected]
Jan Putnis:
[email protected]
Tolek Petch:
[email protected]
Kathrine Meloni:
[email protected]
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A Practical Guide to Contingency Planning and Legal Risk Management
related slaughter and may publications
•
The EU Crisis Management Directive – June 2012
•
Eurozone Crisis: Some suggested Dos and Don’ts – May 2012
•
Copenhagen and beyond:a progress in the Eurozone – April 2012
•
Eurozone 2012: from crisis comes opportunity? – March 2012
•
The Eurozone Crisis: an indicative approach to contingency planning – December 2011
•
Euro break-up/fragmentation: impact on financing documentation – December 2011
•
Eurozone Crisis: what do clients need to know? – October 2011
These publications are all available at the following address:
http://www.slaughterandmay.com/what-we-do/publications-and-seminars/client-publications-and-articles.aspx
SLAUGHTER AND MAY
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For further information, please speak to your usual Slaughter and May contact.
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