In February, Greece launched its sovereign debt swap, pursuant to which holders of EUR 206 billion of its bonds were invited to swap their existing holdings for a package of instruments with a nominal value of just 46.5 per cent. of the par value of their current bonds. This invitation for voluntary participation in the debt swap is backed by the threat of a retroactive collective action clause, enacted by the Greek parliament shortly before the launch of the invitation, which could in certain circumstances allow Greece to force dissenting bondholders to accept these terms.
This is a timely reminder, if one were required, of the precarious finances of many of the Eurozone sovereigns and the corresponding pressures on commercial borrowers located in the Eurozone. Banks holding euro-denominated loans or otherwise holding significant exposure to such sovereigns and borrowers have publicly been urged to consider the possibility of a Eurozone sovereign default, including the possibility of a member state leaving the Eurozone or a break-up of the Eurozone altogether.
However, even banks in the Middle East without such exposure may wish to take a second look at their finance documents and update them to reflect the lessons learned from the Eurozone crisis so far. One such update relates to the definitions of “Permitted Investments” (sometimes referred to as “Authorised Investments”) and “Cash Equivalents”. These definitions usually identify the categories of liquid instruments in which a borrower is permitted to make investments as part of its treasury management function, and which may, in certain circumstances, be treated as equivalent to cash for the purposes of testing financial covenants. By way of example, “Permitted Investments” and “Cash Equivalents” would typically include the following categories of investments:
- short-term certificates of deposit issued by banks and other financial institutions;
- short-term commercial paper issued by commercial entities incorporated in certain specified jurisdictions; and
- liquid investments in certain money market funds,
in each case, provided that the relevant investment satisfies a minimum credit rating requirement.
“Permitted Investments” and “Cash Equivalents” will usually also include marketable debt obligations issued or guaranteed by the United States of America, the United Kingdom or any other participating member state of the European Union. However, in contrast to other categories of “Permitted Investments” and “Cash Equivalents”, investments in the marketable debt obligations of such sovereigns would not customarily be subject to a minimum credit rating requirement in order to qualify as “Permitted Investments” or “Cash Equivalents”, reflecting an implicit assumption that the debt obligations of such sovereigns were sufficiently liquid and of low default risk that a minimum credit rating requirement was unnecessary.
The Eurozone crisis has overturned this assumption and many banks have been taking opportunities to tighten up their finance documents to apply the same minimum credit rating requirement to the debt obligations of European Union member states (and indeed those of the United States of America and the United Kingdom) as apply to other categories of “Permitted Investments” and “Cash Equivalents”.
As the Eurozone crisis continues to dominate financial headlines, few borrowers can find grounds to resist such amendments.
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