The failure of Eircom’s restructuring plan has highlighted tensions around the inclusion of eurozone break-up clauses in corporate contracts.
A planned equity injection by the Irish company’s 65% shareholder, Singapore’s ST Telecom (STT), was abandoned in December after the controlling lenders refused STT’s attempts to include a clause returning half the injection value back if Ireland left the eurozone within a year of the payment.
While STT’s restructuring plan was rejected, David Sonter of Freshfields in London said that it highlights the uncertainty of what is and isn’t acceptable.
With few deals being signed and therefore few precedents, not to mention a lack of legislation to work with, there’s no clear way to include any market Mac (material adverse change clause) that covers a euro break-up that is acceptable to all parties.
“There’s nothing to stand on - you’re speculating about how legislation might work that hasn’t been written yet,” he said.
Nevertheless, for euro-denominated deals where one party’s home country is at risk of leaving the euro, it’s important to think about the potential effect of a euro exit, he said.
According to a Linklaters client briefing note, in the event of a euro exit, many businesses will find that their contracted euro payment obligations with the member state or its connected entities have been converted into a new national currency.
“Creditors of euro denominated obligations that are converted into the new national currency are likely to suffer considerable losses if the new currency falls in value against the euro,” the December 15 note said.
Sonter said it’s important to look forward and think how the country may come out of the euro, how its redenomination will work, and what the exchange rates would be.
“If you have an entity signing up to financial obligations now, if a euro exit does happen the obligations will be worth half what they are now,” he said.
Continental skepticism
Markus Paul of Freshfields in Frankfurt said lawyers in continental Europe are slowly waking up to this issue. If a draft agreement contains a purchase price in euros, it may be prudent to include some language to address this, he said.
However on the continent, the inclusion of any market Macs based on a eurozone break-up is very difficult as the perspective is that a break-up isn’t something that is overly probably or likely to happen.
“My impression is that there might be a higher desire to talk about these things from the perspective of a UK lawyer standing outside the eurozone than for most eurozone-based lawyers, because I think the confidence that somehow we will find a solution so that we won’t need these clauses is much higher within the eurozone than outside it,” he said.
Stefano Sciolla of Latham & Watkins in Rome said the main issue he’s seeing is with the financing. While lenders are imposing market Mac clauses on buyers in facility agreements, the real challenge is getting buyers comfortable without them also trying to apply a similar clause on the sellers.
“Most of the time sellers would resist having a market Mac provision in an SPA [sale and purchase agreement],” said Sciolla. “This is one of the main tensions we’re facing right now.”