New legislation gives European regulators the power to write-down, change the terms of, cancel, and convert into equity the liabilities (including loan commitments) of troubled European lenders.

New credit agreements typically require the borrower to consent in advance to the exercise of these sweeping powers by the regulator. What does this mean to a borrower?

• Loan commitments of European lenders could be reduced or eliminated

• Undrawn commitments of such lenders can be converted to equity, so a borrower would own an equity interest in, instead of having a debt commitment from, the troubled European lenders

• An event of default could be triggered, if owning equity interests in a European lender is not a permitted investment

• European regulators can make other unilateral modifications to borrowers’ credit facilities

What should the borrower do to protect itself? Be sure your credit agreement allows the company to remove or replace troubled European lenders. This language can be added to the “yank a bank” clause. If your credit agreement limits investments, be sure to allow this equity interest.