The Basics of Structuring and Documenting European Borrower Debt in the U.S. Financial Markets
This post was also written by Abbey Mansfield, Phil Slater and Ben Wulwik.
Recent uncertainty in the European financial markets has led many European borrowers to look to the U.S. debt markets for liquidity, and data shows that there is an appetite for European borrower debt in the United States. However, U.S. and European debt markets have developed very different market terms and documentation practices.
European borrowers may be surprised at the market differences, and should be prepared for them when entering the U.S. market. And lenders syndicating the debt of European borrowers should be aware of the basic commercial differences so as to better manage borrower expectations.
A number of customary differences between European and U.S. debt market terms are highlighted below (though of course, terms will be negotiated on a case-by-case basis and may change based on the relative bargaining strengths of the parties). For more information, check back for two additional posts on this same topic.
- U.S.: Documentation is negotiated after the commitment is provided.
- Europe: Interim or full documentation may be negotiated before a commitment is provided.
Form of Loan Documentation:
- U.S.: There is no LSTA standard form credit agreement; each bank typically has its preferred form.
- Europe: LMA form of credit agreement if governed by UK law. For credit agreements governed by the laws of other European jurisdictions, the market position is more aligned with the United States.
- U.S.: Legal opinions are provided by the borrower’s counsel.
- Europe: Legal opinions are provided by the lender’s counsel.
- U.S.: Most votes require a simple 50 percent majority, though there is a unanimous 100 percent vote for “sacred” rights.
- Europe: Most votes require a 66.66 percent majority of lenders, with a super-majority of 80 percent/85 percent/90 percent for certain votes, and unanimous 100 percent votes for certain other “sacred” rights.
- U.S.: Upstream guarantees (from a subsidiary) and cross-stream guarantees (from an affiliate) are quite common, in addition to downstream guarantees (from the parent).
- Europe: Many European jurisdictions severely limit upstream and cross-stream guarantees, and limitation language will be required in credit documentation.
- U.S.: Liens over all assets of a company are relatively easy to create and perfect with a security agreement and UCC filing, and “all asset” security pledges are typical.
- Europe: In many jurisdictions, security creation and perfection can be difficult and often incurs significant notarial fees, leading to more limited and tailored grants of collateral.
- U.S.: There is always automatic acceleration for certain insolvency or bankruptcy events because of the U.S. style of restructuring (more to come on this point in part 3 of this series).
- Europe: Debt acceleration after an event of default (including insolvency or bankruptcy) always requires a positive decision on the part of the required lenders (see the lender voting note above).