LIBOR has been entrenched in the financial system for several years, utilised to calculate interest in transactions ranging from corporate lending and intra-group transfers, to complex derivatives. LIBOR transition provisions may already be hardwired into more recent existing agreements; otherwise, amendments are likely to be required to transition to a new rate calculation mechanism.
In the year to date, Appleby has advised a number of leading UK lenders on the Jersey aspects of their transition away from LIBOR and, in the local market, implemented a number of transitions and new risk-free rate (RFR) referencing loans for Jersey based customers. In light of that experience we offer the following Jersey perspective.
The following points should be considered:
1. LIBOR-based loan or other product portfolios may include Jersey entities either as principals or guarantors who will need to agree to the necessary amendments to the documentation.
2. It is generally accepted that changes to the reference rate under a finance document are not trivial particularly as inter-bank offer rates (IBORs) and RFRs are not economically equivalent. The lenders that we have assisted are taking the view that whether the Jersey entities are principals or guarantors the amendment to the reference rate is one which necessitates express agreement from the relevant Jersey companies, in the form of an amendment agreement.
3. Legal opinions will most likely have been obtained in relation the Jersey counterparties’ power and capacity on the original financing transaction and some lenders are obtaining fresh legal opinions in relation to reference rate amendment agreements. While obtaining a legal opinion will always be our recommended approach to properly manage overseas legal risk in these circumstances, we appreciate that in the context of a large commercial portfolio of loans lenders may not feel that this is commercially or practically viable. We can see therefore that some lenders are not obtaining legal opinions on every amendment agreement, but taking a risk-based approach across their portfolio of loan contracts. By extension of that approach we are seeing lenders proceed without otherwise conducting due diligence on the counterparties’ constitutional documents. However, lenders may wish to consider that our firm is very capable of resourcing large scale due diligence projects efficiently by assembling appropriate teams of lawyers and of course by employing technology.
4. Notwithstanding appropriate due diligence, suitable representations and warranties around power and capacity are generally included in the amendment documentation. A certificate from a director as to matters of power and capacity and their appointment and authority might also be considered.
5. For secured facilities, any amendment to the existing facility agreements may have an impact on the continued validity of security, in particular for existing Jersey law governed security over Jersey situs assets.
6. Where amendments to the existing facility agreements are required, consideration should be given as to whether the amended obligations thereunder continue to be covered within the definitions of “Secured Liabilities” or “Secured Obligations” in the Jersey law security agreements. It is important to check therefore that any facility specific (rather than all-sums) security expressly includes in its scope amendments to the referenced finance documents.
7. In addition, consideration should be given as to whether the proposed amendments may result in the “tipping point” being reached, beyond which purported amendments will be regarded as so substantial and outside the purview of what the parties would reasonably have contemplated at the time of creation of the original obligation that they are not covered by the existing Jersey law security agreements.
8. For Jersey law security interests, secured parties and their advisers will need to decide whether to (1) maintain the existing security (2) confirm the existing security and/or (3) take new security. In many cases we are seeing lenders incorporate a security confirmation within the LIBOR transition amendment agreement, to avoid additional documentation.
The Corporate team at Appleby has wide ranging experience in advising leading financial institutions on large re-documentation projects, as well as new product offerings, regulatory compliance and litigation risk, including the impact of benchmark changes. We are also able to deploy AI solutions for large scale due diligence. With offices in all three Crown Dependencies and 5 other locations, our teams can provide a joined-up service for your project, being led from one office in your time zone.
If you would like to discuss any of the issues raised, please reach out to one of our experts below.