Lenders seek protection against Southern Europe risk

Banks are trying to beef up European syndicated loan contracts to boost their protection against liquidity and redenomination risks involved in lending linked to Southern Europe. At the same time, pan-European companies are trying to bolster liquidity in anticipation of any further credit-tightening in the deepening eurozone crisis.

European companies have been thinking about raising extra liquidity in recent weeks, bankers said, as Spain teeters on the edge of an international bailout and a Greek exit from the eurozone looks increasingly likely.

“Companies are trying to extract credit from banks any way they can as the markets have been a lot more difficult – particularly in the last two weeks,» a loan syndicate head said.

But bankers are seeking to nail down credit risk and even restrict liquidity to European companies’ Southern European subsidiaries as they worry about their ability to retrieve cash from peripheral countries hit hardest by the eurozone crisis – Spain, Italy, Portugal and Greece.

Spanish investment-grade and leveraged loans are trading far below other Western European countries at 90 percent of face value and 72.6 percent respectively, according to Thomson Reuters data.

“Bankersneed to consider how loan agreements can be set up to curtail currency exposure worries in these countries,» a leveraged finance banker said.

Bankers are worried that unexpected subsidiary drawdowns could weaken parent companies’ credit profiles. Redenomination would also threaten subsidiaries’ ability to repay intracompany debt and so further damage parent companies.

Proposed changes to new and existing loan documents include restricting Southern European subsidiaries from drawing undrawn revolving credits or capital expenditure lines – often the first move for companies in the grip of a liquidity squeeze.

International banks are also insisting on using English law in loan agreements – as seen on the 508 million euro facility for Spanish construction firm FCC and the 1 billion euro loan for Spanish utility Iberdrola.

Having loans subject to English law makes them easier to transfer and trade and is also thought to mitigate redenomination risk as banks are confident that an English court would order repayment on the basis of the euro rather than any new currency.

“English law is important to us in all peripheral countries,» said a syndicate head at a US bank.

Some banks have been quietly checking through their loan documents for some time and asking parent companies either for guarantees for their Southern European subsidiaries, or for detailed plans to make repayments in euros if their subsidiaries’ countries leave the common currency.

Companies have also been laying plans and are said to be relatively well prepared for any possible redenomination.

“Corporates have instigated their own safety-net mechanisms — they have tried to minimize local risk, borrow locally to cover local exposure and match funds to minimize redenomination risk,» a senior banker said.

Several banks that were slow to act because they were worried about rocking the boat with their corporate clients are now exploring possible changes, which could be adopted in coming months.

“These changes to loan agreements are not widespread yet but it possible that they could be,» the leveraged banker said. [Reuters]

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