LIBOR Transition: What Is The Impact On Existing Guernsey And Jersey Security? - Securitization & Structured Finance

2021 sees the phasing out of the long established London inter-bank offer rate (LIBOR), with global regulators reiterating that market participants cannot rely on LIBOR being published beyond 31 December. As the global financial market prepares itself to transition from interbank offered rates to a new era of objective quantification offered by risk-free reference rates (RFRs), financial institutions and other lenders are considering how to document the necessary amendments to a raft of legacy facilities.

At the same time lenders will need to be conscious that, in the case of secured facilities, any amendment to the underlying facility agreement may have an impact on the continued validity of security.

Zoë Hallam, Jon Le Rossignol and Pascalle Palmer from our specialist Channel Islands' Banking and Finance team explain what the consequences of LIBOR transition might be for existing Guernsey and/or Jersey law governed security over Channel Islands situs assets.

Step 1 - Examining any LIBOR transition mechanics

The first step is to examine the underlying legacy loan agreement to check if it contains LIBOR transition language. In most facility agreements where the interest rate is linked to an inter-bank offer rate there will already be provisions contemplating a replacement screen rate. Nevertheless, unless a replacement rate is hardwired into the documentation, amendments will be required to transition to such rate.

Step 2 – Examining the definition of secured liabilities

Assuming that there is no replacement rate hardwired into the facility agreement, and that an amendment will therefore be required, we will need to examine the definition of "Secured Liabilities" or "Secured Obligations" in the Guernsey or Jersey law security interest agreement, and consider whether the amended obligations continue to fall within that definition. Most commonly, these definitions reference liabilities secured under a particular set of finance documents, including the relevant facility agreement. A well drafted definition should refer to those finance documents "as amended from time to time", otherwise it may be difficult to conclude that that the existing security would continue to secure the obligations as amended. The definition of "Finance Document" itself should also be reviewed to check that it includes any document designated by the borrower and the lender/agent as such, including, importantly, any letter or agreement documenting the proposed amendment.

If the definition of "Secured Liabilities" or "Secured Obligations" refers to the underlying finance documents as may be amended from time to time, the next step is for the secured party to consider how to interpret it.

Step 3 – Considering how to interpret the definition of secured liabilities

The first issue is whether the amendment to the facility agreement to transition away from LIBOR is sufficiently fundamental that it can result in the amended agreement being treated as a new agreement (often referred to as the "tipping point" question).

The second issue is whether the purported amendment takes the secured obligations beyond the "general purview" of what was contemplated by the parties when entering into the original transaction.

In practice the first and second issues are difficult to distinguish, albeit as the purview principle has its origins in the law relating to guarantees there is arguably a lower threshold to engaging it, particularly in the case of third party security (where the security provider is granting security for the obligations of someone else and will usually not be party to the facility amendment agreement). The consequence for the existing security however, is the same; if the amendment is sufficiently fundamental that it could result in a new agreement, or if the amendment takes the secured obligations beyond the "general purview" of what was originally contemplated, new security is required.

If there is English law security in the transaction, then English counsel will likely also be considering the same issues and the position it takes regarding confirming or retaking security will also be persuasive (particularly as the body of case law around purview is English).

Practical guidance and conclusion

Banks and financial institutions are currently increasingly focused on LIBOR transition and the market's approach to dealing with secured facilities is evolving rapidly.
We expect that, in cases where the underlying facility agreement contains LIBOR transition language, secured parties are unlikely to require new security.
It is currently uncertain however whether, absent new security, secured parties' may require security confirmations and/or legal opinions in respect of such amendments.
In relation to facility agreements which do not contain LIBOR transition language there is a stronger argument that amendments to legacy facilities may necessitate new security or a confirmation of existing security.
In a market where secured parties are increasingly seeking to examine and rely upon rights under security documents, erring on the side of caution is warranted and will typically be backed by a costs indemnity and further assurance clause in the finance documents.
That said, the commercial background to the transaction, the approach foreign counsel take to any existing foreign security and the secured party's risk appetite will all have a bearing on whether new security is taken or a security confirmation is used.
It is possible where appropriate, to 'layer' Guernsey and Jersey security, in other words leave the existing security in place and take new – albeit second ranking but in favour of the same secured party – security over the amended obligations which avoids resetting hardening periods in relation to the original security.
In Jersey, if dealing with security originally created under the Security Interests (Jersey) Law 1983, there will likely be benefits to the secured party of taking new security under the law by which it has been superseded, being the Security Interests (Jersey) Law 2012.

Originally Published by Walkers, February 2021

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.