Brexit—examining the implications for leveraged finance

Matthew Dunn, partner at Clifford Chance, discusses the potential implications for leveraged finance following the UK’s decision to leave the EU.

Has the UK's vote in favour of Brexit had any immediate effects on funding for leveraged acquisitions or refinancings?

We haven’t seen any immediate impact in terms of increased pricing or reduced availability of credit in the European leveraged loan market since the Brexit referendum. On a longer-term basis, if sterling experiences sustained volatility against the euro and/or dollar, non-bank lenders with euro or dollar-based funding may seek to increase pricing for sterling loan tranches in order to reflect increased swap costs. However, any long-term effects will be dependent on the Brexit negotiations and the terms eventually agreed with the remaining EU Member States.

What will be the key concerns of private equity funds?

Private equity sponsors will want to ensure that they can put in place certain funds financings for leveraged acquisitions regardless of any speculation as to market conditions and the form that Brexit may take in due course. For example, we expect sponsors to seek to ensure that there are no Material Adverse Effect conditions to commitment documents, such that they may be resistant to requests from lenders to renegotiate the drafting of Material Adverse Effect conditions. Similarly, we expect there to be continued focus on ensuring underwritten bridge financings are put in place in relation to transactions which are reliant upon capital markets financings/refinancings.

What are the implications of Brexit for existing deals?

The Brexit referendum result has so far had limited implications for existing deals—we’re aware of very few pre-referendum deals which included so-called ‘flexit’ terms. The weakness of sterling against other major currencies in the immediate aftermath of the Brexit referendum may result in tighter financial covenant headroom for certain ‘stressed’ borrowers which have significant dollar or euro-denominated debt, given this currency volatility may affect the calculation of their total debt and therefore their performance against leverage financial covenants for the LTM period ending on 30 June 2016. However, the drafting of most leveraged loan documents should mitigate the impact of such currency volatility.

Once the actual terms of Brexit become clearer over the next few years, there may be requirements for certain changes to loan documentation in order to address changes related to matters such as withholding tax and/or increased costs provisions, although we do not expect there to be any wholesale changes to loan market documentation or any widespread change in the use of English governing law and submission to the jurisdiction of the English courts in relation to loan documentation used in the European market. Leveraged loan documents are drafted to take account of practical market difficulties, for example market disruption events. It is possible that regulatory changes may require lenders to look to the illegality provisions of loan documents if they are unable to make or maintain advances.

Is there anything else that banks or institutional lenders and/or sponsors ought to be thinking about?

We expect that both banks and institutional lenders will monitor changes to the regulatory landscape as a result of Brexit and in particular whether changes to so-called ‘passporting’ rights will necessitate action their behalf to the ensure that their lending vehicles remain able to advance or maintain loans to borrowers located in EU Member States where provision of credit to corporate borrowers is a regulated activity under domestic law and UK-regulated lenders are currently able to rely on the relevant passporting exemptions.

Interviewed by Anne Bruce.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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