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The Euro Crisis: Implications for Loan Agreements

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The Euro Crisis: Implications for Loan Agreements WWW. NYLJ.COM VOLUME 247—NO. 65 THURSDAY, APRIL 5, 2012 SECURED TRANSACTIONS The Euro Crisis: Implications By And For Loan Agreements Alan M. Barbara M. Christenfeld Goodstein owever challenging the Great Reces- all debts owed by its nationals from euros into the Contract,” was enacted in 1997 to address some sion has been in the United States, new currency at a fixed exchange rate. The Depart- of the issues anticipated to arise from the then- it has ravaged the economies of ing Country would likely also impose capital and/or pending adoption of the euro.5 The provision dic- several of the countries that use exchange controls that ban or restrict the amount tates that if the subject or medium of payment of the euro as their common currency of foreign currency or local currency that is allowed a contract is a currency that has been replaced H(the Eurozone).1 Notwithstanding Greece’s bond to be traded or purchased. by the euro, the euro is a commercially reason- restructuring last month, the possibility remains If borrowers are organized or located in (or have able substitute and substantial equivalent that that one or more countries (a Departing Coun- substantial operations or subsidiaries in) a Departing may either be used in determining the value of try) might cease using the euro by leaving the Country, the question arises whether their euro- such currency or be tendered at the conversion Economic and Monetary Union (EMU) and the denominated borrowings will remain payable in rate specified in the regulations adopted by the European Union (EU). Although projecting how euros or will be redenominated into the new cur- EU. It also provides that the euro’s introduction a Eurozone member’s departure might occur is rency. How the Departing Country’s redenomina- does not excuse performance under, or authorize difficult,2 the potential implications of such an tion affects those borrowings under New York law any party unilaterally to modify or terminate, a event on existing and new credit facilities have depends primarily on four factors. contract. been discussed extensively in Europe in relation Governing Law and Jurisdiction Clause. Title 16 applies, however, only to the euro’s adop- to the Loan Market Association’s standard loan The threshold issue, of course, is whether New tion. Neither it nor any other existing or pending documentation. York law applies. Euro-denominated loan tranches legislation in New York deals with the elimination of The topic, however, has received little cov- typically are part of larger credit facilities that are the euro in any Eurozone country. A new continuity erage in the United States. Today, we examine syndicated rather than bilateral. As we have noted of contract statute would presumably occupy the several issues lenders may face under New York often in this space, New York law has become field and, like Title 16, specify New York’s view on law-governed credit facilities that include euro- the law of choice for syndicated lending facilities the principal legal issues discussed herein. In its denominated tranches to borrowers organized or in both domestic and many cross-border deals. absence, however, one must consider how those located in a Departing Country, as well as relevant Most loan market participants choose New York issues might be resolved under other statutes and protective measures lenders may wish to consider law to govern their syndicated credit facilities applicable common law principles. when underwriting new or, where feasible, amend- even when none of the parties to the transac- Currency of Payment. Where the loan agree- ing existing loan arrangements.3 tion have a nexus with New York. As long as the ment is governed by New York law and subject Redenomination and Payment parties have also stipulated the New York state to the jurisdiction of the New York courts, the and U.S. federal courts sitting in New York as the stated currency in which a loan obligation must If a country voluntarily withdraws or is forcibly venue for hearing disputes related to the loan be repaid is the determining factor of whether the ousted from the EMU and/or the EU, that Departing documents, the designated state and (if diver- loan will continue to be payable in euros or will Country will need to establish a new currency (or sity and amount in controversy requirements be redenominated in the Departing Country’s new more likely re-establish its pre-euro currency), and are satisfied) federal courts in New York have currency. If the loan agreement requires payment presumably will adopt legislation redenominating authority to take jurisdiction of, and apply New in euros, and defines “euro” as the single Euro- York law to, a case adjudicating the effect of a zone currency or otherwise shows clear intent of Departing Country’s redenomination legislation such meaning, the borrower’s obligation to repay on the borrower’s agreement to make its loan the loan in euros should be upheld by New York ALAN M. CHRISTENFELD is senior counsel at Clifford Chance. 4 6 BARBARA M. GOODSTEIN is a partner at Dewey & LeBoeuf. payments in euros. courts. If the loan agreement is unclear or refers SHERRY MITCHELL and EMERSON LEE, associates at Clifford Statutory Guidance. Title 16 of New York’s to the currency from time to time constituting the Chance, assisted in the preparation of this article. General Obligations Law, entitled “Continuity of Departing Country’s legal tender, however, New THURSDAY, APRIL 5, 2012 York courts could (depending on other factors, judgment. The Departing Country’s courts may well Illegality. A Departing Country’s currency rede- such as the place of payment) give effect to the enter a judgment in the new national currency by nomination and capital and/or exchange control redenomination. converting the euro-denominated judgment into the policies could also make it illegal for lenders to Place of Payment. Under New York law, the new currency at the exchange rate set by the Depart- fund loans in euros to a borrower in the Depart- place of payment of the loan obligations may trig- ing Country’s exchange control regulations. ing Country or for such a borrower to borrow ger application of the “Act of State” doctrine. This Most New York law-governed loan documents for in euros. Most syndicated multi-currency loan doctrine, which is based on the U.S. Executive cross-border transactions include “judgment cur- agreements include two provisions dealing with Branch’s exclusive authority to conduct foreign rency” provisions purporting to indemnify lenders such an event: a Eurocurrency indemnity, which affairs, limits the power of U.S. courts to render for losses resulting from the purchase of the original requires the borrower either to prepay the euro- judgments on the validity of actions by foreign loan currency with the sum the lenders receive in denominated loan or to convert it into U.S. dol- states within their own borders.7 Thus, if the loan the judgment currency. The validity of such clauses lars; and a Eurocurrency funding provision, which agreement requires the loan obligations to be paid has never been affirmed by a court in New York, and permits lenders to suspend their commitment to in the Departing Country, a New York court might legal opinions typically include an exception as to fund loans in euros. apply the Departing Country’s redenomination their enforceability.10 Lenders should continue to Events of Default legislation and exchange control regulations to include these indemnities in their cross-border loan the debt even though the agreement is governed arrangements for whatever they are worth; yet, even Customary syndicated loan agreements gov- by New York law and specifies the euro as the if they are enforceable under New York law, one ques- erned by New York law do not include a currency exclusive currency for payment. tions whether courts in the Departing Country would redenomination or withdrawal of a Eurozone mem- Nevertheless, as long as the loan agree- give effect to them to compel payment in euros of a ber from the euro as a specific event of default. ment is governed by New York law, chooses New York euro-denominated judgment. Nevertheless, depending on the circumstances, New York venue and clearly provides for loan other events of default might be implicated. payments to be made in euros outside the Cross-Border Defaults. Many loans to foreign Departing Country, New York courts should New York courts have set a high borrowers include defaults for certain political rule that the borrower remains obligated to pay bar for finding impossibility or and other risks that are often hedged by insur- its loan obligations in euros notwithstanding frustration of a contract. ance. These include, for example, war, revolution, any redenomination legislation or exchange expropriation, nationalization and the like; a debt controls adopted by the Departing Country.8 moratorium, currency inconvertibility or other A similar analysis would apply to New York Performance Excuses similar governmental action; a treaty materially law guarantees of payment obligations under impairing a loan provision; the government becom- a euro-tranche facility where the guarantor is Impossibility and Frustration. The capital ing unable to pay its debts when due (including located in a Departing Country. and/or exchange control policies that a Depart- especially if the loan is to a foreign sovereign); Enforcement of Judgments ing Country will likely impose could, in practice, and the borrower is no longer authorized or can- restrict or delay the outward movement of cash not make payments in the specified currency. If In cases based on obligations denominated from the Departing Country borrower or prohibit the credit agreement contains such an event of in a foreign currency, New York applies the so- the borrower from making payments in euros.
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