SECTION 1: Market overview
1.1 Please provide an overview of the cross-border
financing market in your jurisdiction.
Despite the British public voting to leave the European
Union in June 2016 and the resulting climate of political
uncertainty, London remains a global financial centre and thus
far the loan and bond markets have remained resilient.
Liquidity in the loan market in particular has been strong,
with interest rates low, and there has been a supply/demand
imbalance creating a strong environment for borrowers/issuers.
Indeed, the first half of 2017 was dominated by opportunistic
repricing and refinancing transactions, in many cases on
substantially enhanced terms for borrowers.
The market is becoming increasingly accepting of covenant
and terms flexibility. This is in part driven by the changing
investor base. Lending is no longer dominated by banks;
institutional investors and direct lenders are also key
players, have different credit concerns and are often agnostic
between bank debt and bond debt.
Senior-only financing predominates, however in-built
flexibility to raise additional financing at any level of the
capital structure is common place.
1.2 What have been the key trends or developments in
cross-border financing in your jurisdiction over the past 12
Convergence between the European covenant-lite (cov-lite)
market and the US term loan B (TLB) market is a trend that has
been observed for some time now as a result of institutional
investor agnosticism between bank debt and bond debt, and the
past 12 months have been no different. There has though, been
little consistency in the manner in which US terms have been
incorporated into English law documentation. Some deals, often
labelled "high yield in disguise", have adopted wholesale New
York-law governed high yield (HY) style incurrence packages
(often plus a springing financial covenant for the benefit of
the revolving facility or other undrawn facilities) without
material modification to reflect a secured bank loan. Others
import provisions substantially equivalent to those in US TLB
documents, while another subset features a combination of these
approaches peppered with other terms, which while not common in
the US TLB or HY markets, have cleared the market in other
As noted above, the market is becoming increasingly
accepting of covenant and terms flexibility. In particular,
cov-lite deals are now becoming the norm, no longer attracting
a significant pricing premium. EBITDA add-backs to financial
covenants are common, and the ability to raise additional
indebtedness and make distributions is no longer as tightly
1.3 Have there been interesting changes in the structure of
the banking sector in your jurisdiction?
The investor base is diversifying. Direct lending is no
longer confined to the mid-market space; some of the larger
funds are competing against banks for mandates and winning
deals at the top end of the market. Also, banks and direct
lenders are collaborating, with direct lenders helping to
arrange loans that banks would be unable to underwrite
Brexit is of course a wild card and no one knows yet what
the ultimate impact of the expected withdrawal from the single
market and potential loss of passporting rights will be.
SECTION 2: Financing structures
2.1 Briefly outline some recent notable transactions
involving your jurisdiction, highlighting any interesting
aspects in their structures and what they might mean for the
Examples of direct lender activity in the big ticket space
are the unitranche facilities provided to Soho House, Zenith
and Consolis, and the second lien facilities for Diaverum,
Parkdean Resorts and Corialis.
The Eircom refinancing of late 2016 was a good example of a
borrower using an opportunistic refinancing to substantially
amend its terms.
2.2 Have there been any significant developments in the way
cross-border financing transactions are structured or in the
way borrowers and/or lenders are participating in the
The European Central Bank (ECB) published its final guidance
on leveraged transactions on May 16 2016. The guidance provides
that underwritten transactions with a total debt-to-EBITDA
ratio of more than 6x should remain the exception rather than
the rule, and must be justifiable. The impact on the market
remains to be seen, but given that most affected institutions
were already subject to the Leveraged Lending Guidelines in the
US which impose similar requirements, it may well be
The increased flexibility afforded by cov-lite loans and the
continued convergence with the US TLB market has caused many
sponsors to opt for loan financing rather than bond, or to
refinance existing bond debt with loans. Investors are
attracted not only by the flexibility of the product, but also
lack of call protection and public disclosure requirements.
SECTION 3: Legislation and policy
3.1 Describe the key legislation and regulatory bodies that
govern cross-border financing in your jurisdiction.
The Financial Services and Markets Act 2000 (FSMA)
establishes the framework for financial services legislation in
the UK. The Financial Conduct Authority (FCA) and the
Prudential Regulation Authority (PRA) are the two UK financial
services regulators. The FCA is responsible for the conduct of
all firms authorised under FSMA. It is also responsible for the
regulation of conduct in retail and wholesale financial
markets, supervision of trading infrastructure that supports
those markets, and the prudential regulation of firms not
regulated by the PRA. The PRA is responsible for the
micro-prudential regulation of systemically important firms,
including banks and insurers. The loan market itself, however,
is not a regulated market in the strict sense – loan
agreements are not regulated products under FSMA.
The City Code on Takeovers and Mergers is relevant to the
extent that financing relates to the acquisition of a public
ECB guidance as noted above is relevant.
3.2 Have there been any recent changes to regulations or
regulators that may impact the cross-border financing market
and what impact do you expect them to have?
See above regarding ECB guidance and above and below for
3.3 Are there any rules, legislation or policy frameworks
under discussion that may impact lenders or borrowers involved
in cross-border financing in your jurisdiction?
Brexit will of course impact the market in a myriad of ways,
but in the absence of clarity as to the final shape Brexit will
take, in exactly what ways it will impact is still difficult to
say. One area of concern for non-EU lenders licensed in the UK
is the potential loss of passporting rights and consequent
access to the single market. To maintain access, such lenders
will likely seek to become licensed in another EU jurisdiction,
but the extent to which a substantive physical presence in the
new jurisdiction is required (for example whether there will be
a need to set up a fully-fledged subsidiary and locate
decision-makers there) is still unknown.
SECTION 4: Market idiosyncrasies
4.1 Please describe any common mistakes or misconceptions
that exist about the financing market in your
There is no Chapter 11 equivalent in the UK. In the UK
investors assume contractual rights through an intercreditor
agreement (ICA). The relationship between them is not governed
by statute. It is important to be cognizant of this when
structuring a transaction and importing US HY and TLB concepts
into English law governed documents, because some concepts when
imported wholesale will have unintended results. Take for
example the debt incurrence covenant. In the US debt incurrence
flexibility is accepted in part because if all debtors are
American, there is generally no concern about being able to
deal with unsecured creditors or junior secured creditors in a
bankruptcy or restructuring process as it is regulated by
statute. This is different in England where the intercreditor
relationship is governed by the ICA. This has led to the debt
incurrence covenant in Europe being constrained by caps on
unsecured or junior debt, unless the relevant creditor signs up
to the intercreditor agreement, and 'evergreen' intercreditor
agreements, which contemplate at the outset flexibility to
incur future indebtedness at various levels.
4.2 Are there frequently asked questions or often
overlooked areas from parties involved in cross-border
financings in your jurisdiction?
Despite convergence and importation of US style terms there
still remain areas of difference in market practice and
documentation. At the time of press, these included Libor
floors, flex provisions, most favoured nation provisions,
ticking fees and transfer restrictions.
4.3 Are there any classes of assets over which security
cannot be taken or regulations specific to your jurisdiction
governing the taking of security over certain classes of assets
that lenders should be aware of?
No, security can be taken over any asset or class of assets.
However, asset-backed revolving lending arrangements similar to
US ABL-facilities are not common in the UK market.
4.4 What measures should be taken to best prepare for your
The UK market is well developed and relatively
straightforward to navigate when properly advised. It is useful
to be familiar with the differences between loan and bond
products on offer as well as general market terms. As choice of
financing product is often driven by market demand and pricing,
flexibility and adaptability in terms of product choice can be
SECTION 5: Practical considerations
5.1 Briefly explain the downstream, upstream and
cross-stream guarantees available in your jurisdiction, with
reference to any specific restrictions or limitations.
A company incorporated in England and Wales can grant
downstream, upstream and cross-stream guarantees. To do so, it
must demonstrate that it has requisite corporate capacity and
derive sufficient corporate benefit from the transaction.
Demonstrating corporate benefit is straight forward for
downstream guarantees (and is generally dealt with in board
resolutions). For upstream or cross-stream guarantees, in
addition to a specific reference to corporate benefit in board
resolutions, it is also prudent to obtain a shareholders
resolution. If a company is in financial difficulties, the
director's duty to act in the best interests of the company
shifts from being shareholder focused to creditor focused, and
so particular care is required. Guarantees may be capable of
being set aside if the company is, or as a result of the
guarantee becomes insolvent and subsequently goes into
liquidation or administration during the relevant hardening
Under the Companies Act 2006, a prohibition on financial
assistance (which includes the provision of guarantees) applies
where a public company gives financial assistance for the
acquisition of its own shares or those of a parent company; or
a private company gives financial assistance for the
acquisition of shares in its public parent company.
5.2 Are there any specific issues creditors should be
mindful of regarding a bankruptcy and restructuring
English common law upholds the principle established in the
Gibbs case (Gibbs & Sons v Société
Industrielle et Commerciale de Métaux 1890) that
English courts will only recognise a discharge or release of an
English law governed right or obligation if the
discharge/release is also governed by or effective in
accordance with, English law. The court will not recognise a
variation of English law rights / obligations arising as a
result of an overseas proceeding if the creditor party has not
submitted to and is not present in the overseas
5.3 Do foreign debt quotas apply in your jurisdiction and
is offshore financing to domestic entities monitored?
5.4 Describe your jurisdiction's relationship with
non-performing loans (NPLs), including volume of outstanding
NPLs and techniques/challenges in managing them.
SECTION 6: Outlook
6.1 What are your predictions for the next 12 months for
cross-border financing in your jurisdiction? How do you expect
legal practice to respond?
A continuation of the trends seen over the last 12 months.
Flexibility in covenant terms and no financial covenants are
likely to remain constant given institutional investors'
agnosticism between bank and bond terms. Practitioners who can
advise on a multitude of structures and products are likely to
be sought out. Creativity and flexibility on the part of the
legal community as the market responds to Brexit in real time
will also be required.
Craig D Jones
Partner, Sullivan & Cromwell
T: +44 20 7959 8900
F: +44 20 7959 8950
Craig Jones is a partner based in the firm's London
office. He is admitted to the bar in England and Wales
and in New York. Jones pursues a broad-based finance
and corporate practice, and has acted for financial
institutions, private equity sponsors and corporate
clients across a range of industries. His work has
included new money financings, refinancing transactions
and restructurings. His transactions include investment
grade borrowing, leveraged financing and project
Jones's most recent experience includes: advising
Philips on the financing for its Spectranetics
acquisition; Swisscom on infrastructure financing
arrangements with the European Investment Bank (EIB);
GLAS in connection with the reorganisation and
recapitalisation of the Hibu Group; the coordinating
committee of bank creditors to Abengoa during its
restructuring; Coca-Cola HBC on the replacement of its
revolving credit facility (RCF) – having
advised on the original financing arrangements in
connection with the client's re-domiciliation; and
Reykjavik Geothermal on a convertible loan
In addition to his financing work, Jones has advised
on a number of corporate acquisitions and divestitures,
usually involving private equity. He has significant
experience of equity co-investment and fund