Brexit and Material Adverse Change clauses

Brexit and Material Adverse Change clauses

David Campbell, a partner in Allen & Overy’s banking department, considers whether the result in the EU referendum means that Material Adverse Change clauses (MACs) are triggered in credit agreements and mandate letters.

Does the result in the EU referendum mean that MACs will be triggered in credit agreements and mandate letters?

Quite a few clients have asked whether I think the EU referendum vote means that MACs are triggered in credit agreements and mandate letters. The short answer, for business MACs, is 'no'. For the longer answer, read on.

What is the difference between a 'business MAC' and a 'market MAC'?

A 'business MAC' refers to something which happens to the business or performance of the specific borrower (or group) which is party to the finance document. Underwriting commitments may also contain a 'market MAC', which is designed to be triggered by events which are not directly related to the borrower, but affect the debt market generally and, specifically, the ability of the underwriter to sell the underwritten loan to other lenders. It is quite possible that a market MAC (or market flex clause) in a mandate letter may be triggered by market volatility or loss of liquidity caused by the referendum vote—we will have to see how the markets develop over the next few days and weeks. Most questions I have received, though, are about business MACs, which is what the rest of this analysis is about.

What do 'business MACs' drive at?

MACs vary from those which could never realistically be used but are included in documents to tick a policy box, to those which are subjective (in the lenders' favour) and widely drafted. They are designed to deal with unforeseen circumstances so they are, by their nature, drafted relatively imprecisely—if you knew exactly the concern you were trying to address, you would draft a specific clause rather than a MAC. They are there to deal with lenders’ desire to cover the known unknowns.

I have a business MAC in my loan agreement or underwrite—is it triggered?

As always, the specific wording of a clause is important—but in general, to invo

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About the author:

Meet Kate:

1. Banking & finance lawyer with experience in syndicated lending and project finance in London, Paris and Sydney

2. Likes yoga, DIY (although the output doesn’t generally reflect the input) and sunny climes

3. Thinks the law is very unlike how LA Law made it look

Kate is a solicitor specialising in banking and finance with particular emphasis on syndicated lending and project finance. She has acted for both borrowers and lenders on a wide range of finance transactions, often involving multiple jurisdictions.

Kate trained and qualified in the Debt and Derivative Securities team at Allen & Overy LLP. She later joined the Banking and Finance team at Freehills (now Herbert Smith Freehills) in Sydney. Most recently, she was in the Projects and Infrastructure team at Norton Rose LLP before joining LexisNexis. Kate is dual-qualified in England and Wales and New South Wales, Australia.