How would a loss of passporting rights impact on asset finance and the transport sector?
This post is an extract from an article published by PLC on 4 August 2016 looking at a Brexit scenario in which passporting rights are lost (see full PLC article). The post focuses on the potential impact of this scenario on asset finance in the transport sector in particular. The post is not intended to reflect any views on the outcome of negotiations in practice or what the post Brexit model will finally be.
We anticipate that the position for a UK-based lender participating in a shipping finance secured lending transaction involving an EU-incorporated borrower or obligor will be the same as for any other cross-border secured facility from a passporting perspective but is there anything else a UK-based lender should be considering in relation to this type of transaction?
Shipping is an industry that involves international businesses, international trade and international banks. As such, access to capital is worldwide and where a deal is financed will depend on where a party seeking finance approaches its banks. Unless there is a regulatory reason that dictates that financing should be obtained in a certain jurisdiction (for example, to minimise withholding tax for a particular borrower), then parties are generally free to choose where to finance their transaction. Even if funding is booked in a particular jurisdiction, the transaction may be documented in a different jurisdiction according to, for example, where relevant expertise is concentrated or whether a jurisdiction has favourable security and insolvency regimes.
As far as London is concerned, many ship finance transactions are currently documented here even if the funding for those transactions is not booked in London. We anticipate that this situation will continue despite any loss of passporting rights.
And similarly, is there anything else a UK-based lender should be considering in relation to aircraft finance or rail finance transactions?
The position with aircraft finance and rail finance is similar to that of shipping finance as international industries involving moveable assets. If the UK were to lose its passporting rights, this may have an effect on direct borrowing from UK Banks by EU entities, but leasing arrangements (where the borrower is based in a jurisdiction outside the EU and leases the aircraft to an EU entity) would be unlikely to be impacted by such a loss. As is the case with ship finance, we would expect that London would continue to be a busy centre for documenting aircraft and rail finance transactions.
What is the potential impact on capital markets financing for ships and aircraft?
As far as financing shipping transactions is concerned, most funding is loan-based and is not raised in the capital markets. For what few capital markets transactions there are in the shipping market, the most popular locations for bond offerings are New York and Norway which have well-developed markets for these types of financings. So we would not anticipate much of an impact because of the scarcity of deals in the London market.
As far as airlines are concerned, they will face the same issues as other issuers in London in terms of passporting a prospectus if the UK falls outside of the Prospectus Directive regime. In the absence of any reciprocal recognition arrangements, issuers might need to get two separate approvals for two separate prospectus documents, one in the UK and one in an EU jurisdiction. A prospectus approved in one EU jurisdiction still could be passported into other EU Member States as normal. As long as the disclosure requirements in London are kept broadly in line with those in the EU (which would be necessary for London to remain competitive) we would hope that obtaining separate approvals would not be particularly onerous in practice. These issues will not arise, however, if the UK remains in the EEA.
As far as financing rail transactions is concerned, most funding in the UK is loan-based and therefore we would not expect much of an impact.