This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.
European banks had been expected to offload billions of euros worth of debt in the next two years to boost capital ratios and sell-off non-performing assets. However, this is likely to be delayed, or the pool of potential buyers diminished, owing to concerns around Brexit, said Stacey Bairner of Pinsent Masons, the law firm behind Out-Law.com.
According to figures from Deloitte it is estimated that European financial institutions have around €2 trillion of non-core and non-performing assets that may be sold as a result of Basel III and other regulations. It has forecast that €130bn of sales would happen in 2016. Basel III is a global, voluntary regulatory framework that aims to strengthen bank resilience by increasing bank liquidity and decreasing bank leverage. The leverage ratio refers to the minimum level of capital banks have to hold as a proportion of their total assets without weighting for risk.
EU and UK authorities must ‘fast track’ discussions on how cross-border insolvency proceedings would work in the event of Brexit, or risk delaying vital deleveraging by banks across Europe, Bairner said.
"Currently the insolvency regime in Europe is governed by the EC Regulation on Insolvency Proceedings. That allows those seeking to recover debts to appoint administrators knowing that an appointment made in one country will be recognised in another, as will court rulings and so on. It is unclear, in the event of Brexit, whether this will continue to apply to the UK," she said.
"The funds that bid for distressed debt predicate their commercial models to a significant degree on how efficiently they can enforce loan arrangements if required. If there is material uncertainty around what the legal process will look like in two years’ time, it will be harder to assess the ultimate value of the funds. For that reason the pool of buyers willing to tolerate that level of risk may be diminished, and the pricing sellers can demand will be impacted," Bairner said.
Ultimately the decision whether to proceed with deleveraging will be more about price and uncertainty rather than insolvency, she said.
"Given the volume and value of distressed debt expected to come to market in Europe in the next 24 months, and that many of the portfolios will contain assets throughout Europe including in the UK, it is essential that early certainty is provided. There is a risk that, if European institutions cannot obtain the prices they anticipate from sale of underperforming assets, it will impact their ability to meet capital ratios and affect the health of the banking sector as a whole," she said.
"One solution could be found in that a number of individual EU member states are also members of UNCITRAL, a common set of legal principles. You could perhaps assume those principles would apply once the EU legislation falls away and pre any new deal, but even that may not be a comprehensive answer to reassure investors," Bairner said.
Some loan agreements might also have ‘change in law’ provisions that would trigger a default event were Brexit to happen, she said.