Introduction
The Eurozone crisis has been dominating the headlines for much of the last year. As a result of the escalation of the crisis, issuers of bonds have recently been asking how their euro-denominated bonds might be impacted by the Eurozone crisis, and in particular the departure of one or more Eurozone member states from the currency union. As the answer will depend on the particular circumstances of the transaction and the circumstances of any withdrawal from the euro, such as whether there is a complete break-up of the euro and the type of legislation that is passed to deal with the issue, it is too early to give a definitive answer as we simply do not yet know what will happen.
Back to top
Scope
This briefing aims to provide some guidance on the question whether a specific type of bonds which are expressed to be payable in euro will be re-denominated into a new currency. The type of bonds we will specifically deal with are those governed by English law, are subject to the jurisdiction of English courts and payments in respect of which are made outside the relevant departing member state, such as in London.
Back to top
What is the currency of payment?
An English court would be quite likely to decide that the obligation is to continue to pay euro. This is because an obligation to pay euro will continue to be an obligation to pay euro unless the euro has ceased to exist or it is reasonably clear from the documentation that the reference to euro was really intended to mean the currency of the departing member state from time to time. Where a currency is the currency of just one state (like sterling), a reference to that currency is likely to mean the lawful currency of the state from time to time. But, in the case of the euro, there would be no such presumption, because the euro is the currency of a number of different states and it does not necessarily follow that “euro” means “the lawful currency of the payer from time to time”, even if the payer is inside the eurozone.
Back to top
How is “euro” defined?
Clearly, the way in which “euro” is defined in the bond documents is important, although often it is not defined at all. Where “euro” is defined as the single currency of the eurozone, an English court will almost certainly decide, without more, that payments will continue to be made in euro.
Where, however, “euro” is defined as the lawful currency of the departing member state from time to time, an English court may find that the issuer’s obligation has been redenominated in the new currency of the departing member state. This is because it will be clear that the reference to euro was really intended to mean the currency of the departing member state from time to time.
Other ways in which the currency of payment may be defined include “euro or its successor currency” or “the lawful currency of the member states that adopt the single currency in accordance with the EC Treaty, as amended from time to time”. In the former, it may be possible to argue that the currency of payment is the new currency of the departing member state as such currency is the successor currency to the euro in the departing state. The position in the latter case will depend on whether and the extent to which the EC Treaty is amended to facilitate the departure of the member state from the eurozone; again, it is possible that the Treaty may be amended in a way which leads to ambiguity about the currency of payment.
Back to top
What other factors will the Court consider?
Where there is any ambiguity as to the meaning of “euro” in the documentation, an English court will look at other factors such as the place of payment in deciding whether the euro obligation should be substituted by the new currency. If the place of payment is outside the departing member state, it is likely that an English court will decide that the obligation remains an obligation to pay euro. The majority of Eurobonds are in bearer form and held in global form on behalf of international clearing systems (typically Euroclear and Clearstream, Luxembourg), and in these cases the place of payment would be London which is where the global note representing the bonds are usually held by the common depositary on behalf of the clearing systems.
In the ordinary case of a Eurobond governed by English law and where payment is made to the paying agent in London, this should be sufficient to negate any inference that the parties intended to contract by reference to the currency of the departing member state from time to time. This is the case even if there are other connecting factors with the departing state such as, for example, the bonds were issued to finance a project in that country.
Back to top
Summary
In summary, it is likely that the euro obligations owing to bondholders would only be substituted by the new currency if the terms and conditions stipulated for payment to an account of the paying agent or clearing systems within the departing state itself. Such a provision would quite clearly point towards an intended selection of the currency of the departing state. Furthermore, English courts will only recognise and enforce the new currency if the currency of payment is that of the departing member state and it is not against English public policy for the court to do so (this will generally be the case if the departing state’s withdrawal from the Eurozone occurred on a lawful and consensual basis).
Back to top