Conrad Purcell, Partner at Bird & Bird, looks at some of the implications of Brexit for project finance markets.
What impact would Brexit have on the project finance market?
The effect of Brexit has been for UK banks engaged in EU markets to establish themselves in EU countries such as Ireland, The Netherlands and Germany so they can continue to service their clients' needs post Brexit. We do not yet know exactly what the terms of Brexit will be but the deal that has been discussed is largely concerned with regulating goods rather than services. As such the difference between a no deal Brexit and Brexit under a withdrawal agreement would not be very different, from a financial services perspective. It is true that a withdrawal agreement would contain interim provisions giving UK banks passporting rights into the EU but those would not be sufficient to provide any basis for long term planning since they expire at the end of 2020. Thereafter an equivalence regime would determine whether continued passporting out from the UK was permitted but it looks precarious and would not provide the certainty needed to allow a bank to commit to a long term arrangement such a project finance facility.
What preparations is the project finance market making for Brexit?
Industry bodies such as the Loan Markets Association (LMA) and the International Swaps and Derivatives Association (ISDA) have working groups looking at Brexit. They have made recommendations to their members aimed at highlighting specific risks that may arise. Project sponsors are a diverse group ranging from small independent renewable energy power producers through to large state owned utilities and Japanese trading houses. The range of responses on the sponsor/investor side is as varied as one would expect. Sophisticated organisations with a conservative approach to risk commonly devote more resources to understanding the potential risks and taking steps to mitigate them than the more thinly resourced developers who may also be more comfortable accepting certain risks. One feature of project finance transactions is that the process to reaching financial close is a rigorous one which is unlikely to leave any key risks unexamined by the parties' advisers. This is one of the benefits of having multiple advisory teams working on the same project.
Are there any additional clauses, or other documentary changes, that should be made in preparation for a Brexit
The LMA has been providing guidance notes to its members since 2016, flagging the kinds of provisions which are likely to be affected by Brexit. In particular they have focused on points that one can see would be impacted in finance documents such as law and jurisdiction provisions, references to EU law, lending restrictions and bail-in provisions. They have also provided specific optional wording for inclusion in loan agreements e.g. to allow lenders to nominate affiliated entities to participate in specified utilisations without transferring part of the available commitment to that affiliate. This provides flexibility to lenders in situations where local licensing requirements may change post Brexit. Also, the IPFA have provided Brexit training for their members to help market participants to move towards a common understanding of certain Brexit risks.
Is the prospect of a Brexit changing the way deals are structured e.g. different mix of lending or borrower entities or loan tranches?
There are few instances that I am aware of where Brexit has been the fundamental cause of a change to the structure of a project finance transaction. In the cases where Brexit has driven structural changes those changes were made on emerging markets transactions that had no material connection to the UK. As is common in emerging markets transactions, in these cases the sponsors wanted to incorporate holding companies in a jurisdiction with a stable legal system. Although they had initially structured their transactions through local special purpose vehicles in the jurisdiction where the projects were to be built and operated, with English holding companies, they had concerns about the impact of Brexit which prompted them to change the structures of those transactions and instead set up holding companies in another EU country.
Are there any other issues, legal or practical, that project finance lawyers and market participants should be aware of?
Parties to existing projects with project finance should carefully review the provisions of their finance documents (and their project documents, such as EPC contracts, O&M agreements, off-take/tolling agreements etc.) to check that provisions relating to EU law and standards and other areas of potential post Brexit divergence from UK law and standards will not result in contractual provisions that are contradictory or impossible to perform. For example, it is not possible for a contractor to comply with UK and EU standards if those standards are contradictory. The possibility of such unforeseen problems arises under finance documents such as swaptions entered into under ISDA Master Agreements, where Brexit could trigger certain termination events due to the fact that an obligation under the swaption has become illegal following the removal of passporting rights and the exercise of a swaption then results in an illegal derivative transaction.