The Greek crisis and documentation 1

Briefing note May 2015

The Greek debt crisis and eurobond documentation The Greek debt crisis has once again raised the possibility of leaving the area (whether as a result of a Greek sovereign debt or otherwise) as the escalating stand-off between Greece and the euro area, ECB and IMF shows little indication of dissipating. The analysis of implications of a so called "Grexit" under market standard documentation remains much as we outlined in 2011. However, concerns evolve over time and although probably the most extreme, a full Grexit is now just one of several potential scenarios. In light of regulatory requests to update contingency planning, this briefing republishes, and updates, our answers to key questions concerning a potential Grexit and touches on the implications of the more intermediate possibilities of sovereign default and imposition of capital controls.

consensual basis, in each case with Grexit the likelihood of the imposition of capital controls. Accordingly, a Key issues Question: I have a euro- complicated set of possible legal denominated bond issued by a considerations arises, in particular The key provisions in bond private company incorporated in based on whether or not any Grexit is documentation when analysing Greece. If Greece leaves the euro agreed by EU member states and a potential Grexit are: area and re-establishes new facilitated by supporting EU legislation  Jurisdiction drachma, would the issuer still be (and if so on what terms) and whether,  Governing law obliged to pay in euro? as is likely, capital controls are  Currency definitions Answer: One of the challenges with imposed (again, if so on what terms).  Place of payment analysing a Grexit is that the manner Indeed, there could be wider controls  Events of Default and legal basis upon which Greece imposed on the movement of funds or might leave the euro area would assets. Also the conflict of laws impact substantially on the analysis. position would further complicate Greek capital controls could There are a number of ways in which matters, as would the approach render a Greek issuer's it is possible to foresee such an event adopted in any monetary legislation to repayment obligations under an occurring, ranging from a European redenomination. English law bond Union (EU) approved withdrawal from unenforceable in some For the sake of simplicity, therefore, the EU and the euro area or an circumstances assume that Greece passes a law approved withdrawal from the euro establishing monetary sovereignty, The key provisions in bond area but not the EU (although there is redenominating all owed by and documentation when analysing no mechanism in the EU Treaties for to its nationals from into new the effects of a potential Greek the latter), to Greece's unilateral drachma and that it does so without sovereign default are the withdrawal from one or both on a non- Events of Default

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EU consensus and over-arching EU then EU law (the recast  (c) Currency of payment – legislation. (We will not complicate the Brussels I Regulation) If the bond is governed by analysis by considering the impact of would, prima facie, oblige English law and is subject to any capital controls here, but see the English courts to recognise the exclusive jurisdiction of box headed "Capital controls" for a and enforce a judgment of the English courts, the main discussion of the issues involved.) the Greek courts, unless to question is whether the do so would be "manifestly contractual intention was for If you have a typical euro- contrary" to English public the currency of payment to denominated bond with an English policy. be (i) the single European governing law provision, submission currency, in which case the to the exclusive jurisdiction of the bonds would remain payable English courts and a payment  (b) Governing law – If the in euros, or (ii) the currency obligation in the single European bond is governed by Greek of Greece from time to time. currency with payment outside law, the English courts would This should be determined Greece – and assuming that no give effect to Greece's by the specific currency consensual protocol is established by redenomination legislation definition in the terms and the EU to permit a Grexit, then the pursuant to EU law (the conditions – or, where the English courts should hold that Rome I Regulation). The definition is not definitive, by payments are to be made in euro and, English courts could decline reference to any other if they are not made in euro, there will to do so only if necessary to relevant circumstances, be a payment event of default. give effect to overriding including the place of However, where any of these factors English mandatory laws, or if payment and any other are missing, then the analysis giving effect to Greece's evidence as to the issuer's becomes more complicated. redenomination legislation was manifestly incompatible intentions. Absent special There are four main areas in bond with English public policy. circumstances, a definition of terms and conditions that are relevant This would be the case only "euro" by reference to the to determining the currency in which in unusual circumstances. If, currency adopted on the debt is to be paid: (a) the however, Greece passed its monetary union (or pursuant submission to jurisdiction provision; (b) redenomination legislation in to European treaties or the governing law of the bonds; (c) breach of an EU Treaty, it is similar references), rather the way in which the obligations to possible that the English than by reference to pay in a particular currency are courts would consider Greece's currency from time drafted; and (d) the place of payment enforcement of that to time, should operate to stipulated in the terms and conditions. redenomination legislation to make clear that the intention is for the currency of We discuss each of these below: be contrary to English public policy. If, on the other hand, payment to be the single  (a) Jurisdiction – If the the governing law of the European currency. jurisdiction submission bond is English law, and is provision permits the Greek subject to the exclusive  (d) Place of payment – The courts to have jurisdiction jurisdiction of the English place of payment could be then, whatever the governing courts, Greece's relevant for two main law, those courts would, in redenomination legislation reasons. First, if there is no all likelihood, give effect to would affect the issuer's currency definition in the the Greek redenomination obligations under the bond terms and conditions, but the legislation. So it would be only if they required payment place of payment is within likely to mean that the issuer in Greece's currency from Greece, that creates a would be able to pay in new time to time, as discussed rebuttable presumption that drachma and not in euros. next. the currency of payment was On the assumption that intended to be the currency Greece remains in the EU,

The Greek debt crisis and eurobond documentation 3

of Greece from time to time. Question: I have obtained a in euro but the issuer tries to pay in If the bonds require payment judgment from an English court. If new drachma, this would likely in the currency from time to Greece has left the euro area, can I constitute a payment event of default. time of Greece and Greece enforce it against the issuer's Indeed, the issuer may be in financial changes its currency from assets located in Greece? difficulties occasioned by the the euro to new drachma, Answer: Obtaining an English court withdrawal and redenomination, and the payment obligation under judgment against the issuer is one not be able to make any payment the bonds will, similarly, be thing. Enforcing against assets in regardless of currency. converted into an obligation Greece following a Grexit is Unlawfulness: If Greece were to to pay new drachma something else. If the issuer has withdraw from the euro area, it is (converted at the rate set out substantial operations and assets in highly likely that it would impose in Greece's redenomination Greece, a bondholder would normally capital controls and that the issuer legislation) (this is often (assuming Greece remains in the EU) would only be allowed to (re)pay referred to as the lex enforce against those assets by euros if it first obtained consent (likely monetae principle). The asking the Greek courts to enforce to be administered through the Bank presumption that the issuer the English judgment. In the case of a of Greece or the Greek Ministry of intended the currency and Grexit, Greece's courts would almost Finance). If such consent were not place of payment to be certainly be required to give effect to granted and if the bond terms and aligned is, however, rather Greece's redenomination legislation conditions contain "Unlawfulness" as weak, and the courts will and would, therefore, be unlikely to an event of default, it is arguable that look at all the circumstances recognise, or enforce, an English a default under the bonds might be in order to ascertain whether judgment for euro-denominated debt triggered. However, this would require the issuer intended the against the issuer. As a consequence, careful consideration of exactly what currency to be that of the enforcement against Greek assets the capital control law provided. This euro area or that of Greece. would be difficult. is also a point to bear in mind in Secondly, Greece's Participation Note (LPN) structures redenomination legislation Question: I have a euro- where the underlying borrower is could render payment in denominated bond issued by a based in Greece. euros illegal, regardless of private company incorporated in the requirements of the Greece. Would a Grexit trigger an Other events of default: Any bonds. If so, for contracts event of default under my bonds? ensuing financial difficulties might concluded on or after 17 Answer: Typically, bond terms and also mean other events of default or December 2009, the English conditions did not include events of any event of default would courts have a discretion default addressing either general apply or that financial covenants under EU law (the Rome I sovereign risk or euro area exit. might be breached. Regulation) to give effect to There was some discussion at the Question: If my bond contains a that legislation if (i) the place height of concern over change of currency provision or a of payment is Greece and (ii) redenomination in 2011-2012 of currency indemnity, might this help? as would probably be the making these circumstances express case, that legislation events of default, but they seemed to Answer: At the height of concern represents an "overriding gain little traction. It is therefore over redenomination in 2011-12, mandatory provision" of unlikely that terms and conditions there was occasional consideration of Greek law. For contracts would do so, but you should check. providing a contractual concluded before that date, However, depending on the redenomination framework to give the the supervening illegality in circumstances, some of the more option to redenominate an issuer's the place of payment would common events of default might be euro-denominated obligations into (for render the obligation to pay relevant, for example: example) US dollars on a Grexit or in euros in Greece similar event. There was little take-up unenforceable as a matter of Non-payment: If the issuer's of this option, but it is likely to be English law. payment obligations are denominated worth checking the terms of any

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bonds, especially if it was entered into it might remain difficult in practice to concern. Additionally, receipt of in or after 2011-12. However, it is enforce a judgment against Greece in payments, even if the issuer was important to note that even if included, Greece itself. apparently able and willing to pay, such a mechanic is not without could be blocked or delayed by the Question: Could there be cross obstacles as it could well be capital controls which would be likely defaults or defaults under related overridden by the relevant to be implemented prior to or support and derivatives redenomination legislation. alongside any currency documentation as a result of Grexit? redenomination. Of course, the A currency indemnity is often included Answer: Yes. Even if obligations fundamental difficulty with achieving to cover potential currency losses of under the bond issue remain repayment would relate to whether, the bondholders in relation to a denominated in euro and no events of given the economic circumstances, judgment of a court which is given in default were triggered by Grexit, the the issuer actually has sufficient a currency other than the contractual issuer could be party to other resources to pay in whatever currency currency. Such an indemnity may be agreements or underlying credit and, indeed, whether it is insolvent. relevant where judgment is given in support or swap agreements which Therefore you may have done your new drachma but the payment may be defaulted by these events. best to preserve your position, but provisions remain denominated in achieving actual repayment in volatile euro. However, there are some Question: Are there any other and uncertain times would still be an doubts as to the effectiveness of such steps I should take to prepare for a achievement. indemnities generally. Grexit? Question: I hold a euro- Question: I have a euro- Answer: The essential thing will be denominated bond issued by a denominated bond which is to establish whether you hold bonds private company incorporated in guaranteed by a guarantor in which are potentially affected, to Greece. If Greece keeps the euro Greece. Would Grexit impact the locate all relevant documentation but introduces a second currency guarantee obligations? (including any credit support, guarantees, security, hedges, would the issuer still be obliged to Answer: The effect on the guarantee insurance etc) and to analyse how pay in euro? would be a matter for the governing robustly they deal with the issues law of the guarantee. The points Answer: It will depend largely on the discussed above. "Forewarned is nature of that second currency and referred to in answer to the previous forearmed", and you may need to be questions would also be relevant here. the extent to which any legislation in a position to act rapidly if purported to allow euro-denominated Most important would be whether the circumstances demand. intention was that the guarantor's debts to be payable in any second euro payment obligations were to be Question: If the bonds I hold currency. At one end of the spectrum, in euro or in the national currency of satisfy the conditions as to the issuance by the Greek Greece from time to time. governing law, submission to government of a form of negotiable jurisdiction, currency and place of instrument to Greek institutions in Question: What if my issuer is payment so that (absent any exchange for those institutions' euro- Greece itself? overarching EU legislation) it is denominated assets would be likely to Answer: For a sovereign issuer, in likely that an English court would have a minimal effect on the addition to looking at English give a euro-denominated judgment denomination of a euro-denominated governing law and submission to the on its terms, notwithstanding a bond. At the other, an adoption of a jurisdiction of the English courts, it Grexit, is that an end to my second currency deemed by law to be would also be important to consider concerns? equivalent to euro for all purposes whether there is a waiver of immunity Answer: No. Future overriding EU would be much more akin to a Grexit, provision because typically there is legislation could impact the analysis. and it is likely that the above analysis immunity under domestic law from As explained above, enforcement would be relevant. attachment of a sovereign's assets against assets located either within Even if there is a waiver of immunity, Greece or outside England could be a

The Greek debt crisis and eurobond documentation 5

Stand-alone sovereign Capital controls default Greece may need to introduce capital controls as part of any Grexit or Question: I hold a euro- sovereign default. They might also be imposed as a stand-alone measure to denominated bond issued by to a stem deposit outflows. private company incorporated in Question: What are they and why are they important? Greece. What are the implications if Greece remains in the euro area Answer: Capital controls (sometimes also called exchange controls) are but defaults on its government national laws which restrict buying and selling of national currency or preserve currency within a country. They can take many forms but most relevant for debt or its arrangements with the these purposes would be a Greek law having the effect of restricting Greek IMF and/or the euro area? issuers from making payments to their lenders. Answer: The implications of a Greek Greek capital controls are unlikely to be directly relevant when determining payment default are likely to be less the extent to which a Grexit might impact the denomination of a euro- fundamental than those of a Grexit. denominated bond. Their significance lies in the fact that they might render By itself, a Greek payment default is the issuer's obligations unenforceable in some circumstances. This is unlikely to affect either the extent to because they are an exception to the general rule that foreign legislators are which the bond is denominated in unable to change the terms of an English law governed bond. English law euro or the enforceability of an would give effect to certain types of Greek capital control by rendering unenforceable payments which conflict with the requirements of those capital English judgment in Greece (although controls. any accompanying capital controls will be important, see the box headed Question: When would English law give effect to Greek capital controls? "Capital controls"). Leaving aside Answer: The international effect of capital controls is governed by treaty (the capital control questions, an investor's IMF's articles of agreement). In essence English law is likely to give effect to main concern will be that a sovereign Greek capital controls which (i) are imposed in a manner consistent with the default is likely to precede a downturn IMF's framework and (ii) relate to "exchange contracts". in the fortunes of a Greek issuer and Although not totally clear, it is likely that capital controls affecting payments in the key question will be whether it connection with bonds would be consistent with the IMF framework only if the could trigger an event of default. It is IMF consented to those capital controls. IMF consent, although more than a unlikely that typical bond terms and formality, may not be difficult to obtain: it was granted in respect of certain conditions will contain events of types of transaction to both Iceland in 2008 and to Cyprus in 2013. default expressly linked to sovereign The meaning of "exchange contract" under the IMF articles of agreement is risk, but this should be checked. difficult to nail down. Different countries take different approaches. Some Even an event of default expressly countries (e.g. France and ) take a wide view and consider that linked to a Greek payment default will any contract affecting the exchange resources of the relevant state is an require careful consideration as it may "exchange contract". On this view any bond would be an "exchange be triggered only by defaults on contract". Other countries (e.g. the UK, the US and Belgium) take a narrow private sector borrowings and not by view and consider that only foreign exchange contracts are "exchange Greece defaulting on its contracts". As a result, if litigation were to take place in a jurisdiction that arrangements with the IMF and/or the takes the wide view, there is greater chance of payments under a bond being rendered unenforceable under English law by Greek capital controls than if euro area. In the absence of a litigation took place in courts taking the narrow view. specific event of default it is likely that one of the other events of default Question: Are capital controls consistent with the EU Treaties? (relating to its financial condition) will Answer: The EU Treaties prohibit capital controls but allow measures which be the most relevant provision. are justified on grounds of public policy or public security. This sets a high hurdle but is what enabled Cyprus to introduce capital controls in 2013. See our briefing entitled "The euro area and capital controls" for further discussion of the issues involved.

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The wider context foresee how a Grexit might be support of other euro area states implemented from a legal perspective pursuant to a treaty or other legal and there would be many political, framework which does not currently The above simply gives a flavour of economic and practical barriers to exist. The manner of implementing some of the issues generated by the such an event. There is no existing any exit route would have substantial Greek debt crisis. There are likely to mechanism under the EU Treaties for implications in relation to the analysis be many more questions and a state to depart from the euro area as to the legal consequences on concerns regarding its impact on and therefore Greece would either be contractual arrangements, especially bond documentation, particularly in exiting on a non-consensual basis or in the context of any conflict of laws relation to any Grexit. As with any on a consensual basis with the analysis. hypothetical situation, it is difficult to

Authors

David Dunnigan Stewart Dunlop Kate Gibbons Simon James Partner Partner Partner Partner T: +44 20 7006 2702 T: +44 20 7006 2787 T: +44 20 7006 2544 T: +44 207006 8405 E: david.dunnigan E: stewart.dunlop E: kate.gibbons E: simon.james @cliffordchance.com @cliffordchance.com @cliffordchance.com @cliffordchance.com

Jonathan Lewis Julia Machin Simon Sinclair Deborah Zandstra Partner, Paris Managing Senior PSL Partner Partner T: +33 14405 5281 T: +44 20 7006 2370 T: +44 20 7006 2977 T: +44 20 7006 8234 E: jonathan.lewis E: julia.machin E: simon.sinclair E: deborah.zandstra @cliffordchance.com @cliffordchance.com @cliffordchance.com @cliffordchance.com

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