By Kristen Haunss
NEW YORK, July 6 (Reuters) - Companies that borrow to help fund their operations and the firms that lend to them are warning potential investors that the recent vote by the United Kingdom (UK) to leave the European Union (EU) may affect earnings and debtholder returns.
Borrowers are including language in their bond documents warning that market volatility and uncertainty caused by the June 23 referendum may impact their earnings and their ability to access credit markets. The day after UK citizens went to the polls, markets were in a tailspin with the Dow Jones Industrial Average falling more than 600 points, and loan and structured credit indices also dropping.
"The risk factors seem to be focused on - none hit on all of the potential risks - that there may be an impact on the results of operations of the issuer, if, for example, they have a significant UK business that could be impacted by changes in exchange rates for the British pound," said Jeffrey Ross, a partner in law firm Debevoise & Plimpton's finance and private equity groups in New York.
"A couple of offering memorandums focus on the ability to access the capital markets and some risk factors call out that could not only impact the results of operations of the company, but may also impact the debt and equity capital markets and a company's ability to refinance," he said.
Uncertainty in the market is leading companies - at least seven since the vote, according to an Xtract Research report - to include different types of Brexit risk disclosures in their bond offering documents.
A borrower "would rather come out and state potential issues, rather than have something happen in which it could potentially be liable for misleading or misrepresenting something that is potentially on the horizon," said Jessica Reiss, co-head of leveraged loan research at Covenant Review in New York. "It is better to disclose more potential risk factors than fewer."
Molson Coors Brewing Co in a prospectus supplement said almost 11% of its net sales in 2015 came from the UK, its largest market in Europe, and it could not predict the impact the referendum will have on the economy, according to a July 1 regulatory filing.
"Weakening of economic conditions or economic uncertainties tend to harm the beer business and if such conditions emerge in the UK, or in the rest of Europe, it may have a material adverse effect on our European segment," the company said.
The company was offering 800m of 1.25% senior notes due 2024, according to the filing.
Real estate investment trust Omega Healthcare Investors said in a final prospectus supplement that Brexit's potential adverse affect on the European or worldwide economic markets may impact its business opportunities, the results of its operations and its cash flows, according to a July 5 regulatory filing.
Omega was offering US$700m of 4.375% senior notes due 2013, according to the filing.
A Molson spokesperson declined to comment. An Omega spokesperson did not return a telephone call seeking comment.
Warnings are also being extended to structured products. Credit Suisse Asset Management (CSAM), which is currently seeking to raise a US$611.4m Collateralized Loan Obligation (CLO), in its offering memo cautioned potential investors that future negotiations to determine the terms of the UK's departure from the EU could lead to a period of significant uncertainty. This may affect the ability to pay investors in the fund, according to sources.
The "uncertainty could have a material adverse effect on the issuer's ability to make payments on the securities," according to the document.
A CSAM spokesperson declined to comment.
CLOs, which pool loans of different credit quality, sell slices of the fund of varying seniority, from Triple A to B, to investors including insurance companies. The most junior and riskiest portion of the fund, the equity slice, is paid last with what is left over after the fund's bondholders receive their distributions. CLOs are the largest buyer of leveraged loans.
"Going forward, we will see CLO offering circulars include a Brexit risk factor," said Deborah Festa, head of law firm Milbank, Tweed, Hadley & McCloy's West Coast securitization and investment management practices. "Because the UK has not yet formally begun the process of withdrawing from the EU, and there are questions about whether and when that step may occur, the risk factor is likely to take a very broad and general shape."
The volatility from the Brexit vote, and the potential economic impact, may also affect the businesses of borrowers of the underlying loans included in a CLO, Festa said.
Leveraged loans, however, do not tend to have the same disclosures as bonds do, said David Campbell, a partner in London in the banking division of law firm Allen & Overy.
As more borrowers seek to issue bonds and companies release their second quarter earnings, more risk disclosures related to Brexit are expected, sources said.
"Most borrowers are going to be including some type of [Brexit risk disclosure]," Ross said. "It's the one thing everyone is talking about." (Reporting by Kristen Haunss; Editing By Lynn Adler and Michelle Sierra)