This content is from: Local Insights

Costs of funds

It's interesting to get a Dutch perspective on how borrowers have responded to banks attempting to charge increased costs under Dutch law governed loan documentation.

In the course of the credit crisis, it became clear that quoted Euribor (Libor) differed from the actual costs of funds banks incurred when lending to borrowers. The cause of this mismatch appears to be due to banks not wanting to quote their actual costs of funds, being concerned that they might suffer rating downgrades or reputational damage if these were revealed.

In order to recover these losses, banks have attempted to rely on the market disruption clause, a standard clause in LMA loan documentation. When doing so, banks encountered a few hurdles. First the identity of the bank would be disclosed and second, it would have to substantiate what its actual costs of funds are to the borrower, which often proved difficult and would give the borrower and other financiers (at least the facility agent) details about the bank's treasury activities that it might not be willing to disclose.

Estelle van Heerden

This has not gone unnoticed in the Netherlands, but in our experience it has not led to actual changes in the market disruption clause used in Dutch law LMA-style loan documentation following the recent LMA changes, mainly because the various reference bank concepts included in the LMA's latest leveraged loan standard are considered too complex.

Under Dutch law, if the loan documentation does not provide for a provision that allows the bank to charge the borrower for increased costs, the only way to charge increased costs is to rely on the Dutch law concept of unexpected circumstances (onvoorziene omstandigheden). However, this would require court intervention, which will only be successful if it can be substantiated that on reasonable grounds continuation of the loan documentation on its existing terms cannot be expected by the borrower. To date, we are not aware of any Dutch case law where a bank has been successful in putting forward an argument to this effect.

Babette Vos

Even where loan documentation allows for banks to charge increased costs, borrowers have requested banks to clarify on what basis they are entitled to such an increase. Were these unavoidable in the current market or perhaps due to the banks own financial position or treasury policy? Most increased costs clauses will offer a level of protection against borrowers making an argument of this kind by stating that "any increased costs made attributable to the loan" are chargeable to the borrower, regardless of their exact cause. But, depending on the circumstances of the case, the borrower may to some extent be able to rely on the Dutch law concept of reasonableness and fairness (redelijkheid en billijkheid) and arguments along these lines may be no less powerful even if made on a commercial level. Similarly, a borrower might argue that increased costs can only be charged if a bank is charging all its customers with similar loan conditions.

Borrowers have thus far not accepted the attempt by some Dutch banks to charge increased costs without a challenge. In the short to medium term we do not foresee that this position will change, rather banks will act pre-emptively by adapting their pricing to cover possible increased costs on extending or renewing loans or on the next interest fixing date.

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