It's arrived, the Euro is now the official currency of the eleven participating Member States of the European Union. Any borrowings or payments made in the "local" currency of a participating country can now be made in Euros. Although the UK has opted out of economic and monetary union, the government has promised a referendum shortly after the next election.
Banks and borrowers should consider whether their existing loan agreements require any amendments. This applies not only to syndicated loans involving banks in participating Member States, but also to bilateral loans involving borrowers in such countries or containing multi-currency options which either expressly or implicitly include the currency of a participating Member State.
A number of points apply to any such existing loan agreement irrespective of when the loan matures.
Business Days
The recommended market practice is to treat as "Business Days" all days upon which the TARGET (Trans-European Automated Real Time Gross Settlement Express Transfer) system and at least two real time gross settlement systems of the participating Member States are open for euro transactions. However, whilst TARGET will be open every day apart from Christmas Day and New Year's Eve for money transmission, it is not yet clear whether the inter-bank market in London and in participating Member States will be open for the purpose of interest rate fixing on those days which would ordinarily be national bank holidays.
LIBOR
Definitions of Libor may need to be amended in relation to advances in euro. With a number of alternative settlement rates available, including EURO BBA LIBOR and EURIBOR, the agreement should state clearly which is to be used, with the bank retaining the right to select an appropriate rate in the event of any dispute. Existing LIBOR screen rates for the former national currencies of participating Member States will remain available until the end of the transitional period (31 December 2001), however.
How Will Interest be Calculated?
The market convention for calculation of interest on the euro will be on the basis of a 360 rather than 365 day year. Any reference to calculations according to market convention will need to be amended if the calculation was on a 365 day year (e.g. for the Belgian Franc, the Portuguese Escudo and the Irish Pound).
Set-off Clauses
Set-off clauses may also be affected. In many cases no amendment will be required if the clause contained conversion provisions to allow for set-off between different currencies. However, if the agreement did not allow for this then whilst banks' rights may be improved as a result of the euro being a single currency it may also lead to unexpected consequences. For example, French Francs are no longer a different currency from Deutschemarks, but simply a different denomination of the euro. In a facility to a group where interest is calculated on a net basis across the group for each currency, credits in Deutschemarks can be offset against French Francs borrowing.
Banks should be entitled to recover any costs imposed upon them by the new European Central Bank in relation to the euro and increased costs clauses within loan agreements should be reviewed to ensure that they are wide enough.
Any loan involving the currencies of the participating Member States which has not matured by 31 December 2001 will need at some stage to be re-denominated into euros when it is recommended that the market conventions relating to the euro are adopted.
ONE EURO EQUALS:
For further information please contact Gwen Griffiths, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000
This article was first published in the Winter 1998/1999 Hammond Suddards Banking Newsletter
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
Banks and borrowers should consider whether their existing loan agreements require any amendments. This applies not only to syndicated loans involving banks in participating Member States, but also to bilateral loans involving borrowers in such countries or containing multi-currency options which either expressly or implicitly include the currency of a participating Member State.
A number of points apply to any such existing loan agreement irrespective of when the loan matures.
Business Days
The recommended market practice is to treat as "Business Days" all days upon which the TARGET (Trans-European Automated Real Time Gross Settlement Express Transfer) system and at least two real time gross settlement systems of the participating Member States are open for euro transactions. However, whilst TARGET will be open every day apart from Christmas Day and New Year's Eve for money transmission, it is not yet clear whether the inter-bank market in London and in participating Member States will be open for the purpose of interest rate fixing on those days which would ordinarily be national bank holidays.
LIBOR
Definitions of Libor may need to be amended in relation to advances in euro. With a number of alternative settlement rates available, including EURO BBA LIBOR and EURIBOR, the agreement should state clearly which is to be used, with the bank retaining the right to select an appropriate rate in the event of any dispute. Existing LIBOR screen rates for the former national currencies of participating Member States will remain available until the end of the transitional period (31 December 2001), however.
How Will Interest be Calculated?
The market convention for calculation of interest on the euro will be on the basis of a 360 rather than 365 day year. Any reference to calculations according to market convention will need to be amended if the calculation was on a 365 day year (e.g. for the Belgian Franc, the Portuguese Escudo and the Irish Pound).
Set-off Clauses
Set-off clauses may also be affected. In many cases no amendment will be required if the clause contained conversion provisions to allow for set-off between different currencies. However, if the agreement did not allow for this then whilst banks' rights may be improved as a result of the euro being a single currency it may also lead to unexpected consequences. For example, French Francs are no longer a different currency from Deutschemarks, but simply a different denomination of the euro. In a facility to a group where interest is calculated on a net basis across the group for each currency, credits in Deutschemarks can be offset against French Francs borrowing.
Banks should be entitled to recover any costs imposed upon them by the new European Central Bank in relation to the euro and increased costs clauses within loan agreements should be reviewed to ensure that they are wide enough.
Any loan involving the currencies of the participating Member States which has not matured by 31 December 2001 will need at some stage to be re-denominated into euros when it is recommended that the market conventions relating to the euro are adopted.
ONE EURO EQUALS:
13.7603 Austrian Schillings 40.3399 Belgian Francs 1.95583 Deutschemarks 5.94573 Finnish Markka 6.55957 French Francs 0.787564 Irish Pounds 1936.27 Italian Lira 40.3399 Luxembourg Francs 2.20371 Netherlands Guilders 200.482 Portuguese Escudos 166.386 Spanish Pesetas
For further information please contact Gwen Griffiths, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000
This article was first published in the Winter 1998/1999 Hammond Suddards Banking Newsletter
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
