When amending a material term of a loan transaction that includes guarantees and/or security governed by the laws of several jurisdictions, it is often prudent for creditors to obtain guarantee and/or security confirmations to ensure that the amendment does not adversely affect their rights to claim under the guarantee or enforce the security. As we head toward 2021, it is well documented that loan agreements with final maturities beyond the end of 2021 that are priced by reference to an IBOR benchmark will need to be amended unless they contain fallback provisions that stipulate a replacement rate for, or procedure for replacing, the relevant IBOR. So, will changing the benchmark rate necessitate guarantee and/or security confirmations, or will this additional hurdle be something that can be avoided?
Amending Legacy Deals
The need to amend a huge number of legacy deals to reflect a transition from IBORs to RFRs will require facility agents, lenders, borrowers and law firms to invest significant time and money, even with the assistance of artificial intelligence tools (“AI”). This issue will be exacerbated if, in addition to amending loan agreements, it also will be necessary to obtain guarantee and pledged collateral confirmations, as well as legal opinions from various jurisdictions. This is likely to be of particular relevance to cross-border deals that involve multiple obligors and jurisdictions. Despite potential help from AI with some elements of the transition away from IBORs, it is difficult to see how this task can be automated, given the variety of collateral and jurisdictions potentially applicable to individual transactions.
The question for lawyers, therefore, will be whether guarantee and pledged collateral confirmations are required if the amendment being made to the applicable loan agreement solely relates to switching from an IBOR for a particular currency to the relevant RFR. The answer will be specific to the documents and the jurisdiction governing the guarantee or security agreement. In this post, we consider the position in two jurisdictions: the United States and England.
What is the Situation in the U.S.?
As a matter of laws in the United States (including New York and other states likely to be the governing law jurisdiction for commercial loan transactions), the types of loan contract amendments that are expected to be taken in connection with a transition from an IBOR to an RFR are not expected to trigger a discharge or other issue with any existing guarantee or collateral documentation. Guarantees and grants of security interests in collateral generally support a borrower’s obligations under a particular loan agreement as it may be amended or modified from time to time.
Lenders in the U.S. often request that guarantors and grantors of security interests in collateral ratify guarantees and security interest grants in connection with increases in principal amount of loan obligations, extensions of maturity, additions of tranches under a loan agreement and other material changes in economic terms, though such ratifications are not considered necessary in order for the guarantee or collateral to extend to the modified debt. Such ratifications are not typically requested in connection with other provisions, including solely a change in interest rate, provided that the quantum and maturity of the debt are not changed, and it is not expected that such ratifications will be necessary or otherwise required in connection with the transition to an RFR, absent other changes in the underlying debt documents to be made concurrently with that transition.
The Situation Under English Law
As a matter of English law, the variation of a contract between a creditor and a principal debtor which could prejudice a guarantor or a third party chargor will discharge the guarantor or chargor from liability, unless the variation is one to which the guarantor or chargor has consented, or it is contemplated in the guarantee or security itself. In any event, it is worth remembering that the amended underlying contract needs to remain within the “general purview” of the guarantee or security; if the amendment effectively creates a new contract to be secured, a new guarantee and/or security is needed.
In theory, if the variation is of a type contemplated in the guarantee or security and is within its general purview, it is not necessary either to take a new guarantee or security or to ask for a confirmation. However, since existing case law, including Triodos Bank NV v Dobbs, does not provide definitive guidelines in this area, it is necessary to take a cautious approach, involving a careful review of the particular fact pattern of the original transaction and the proposed amendment. If, as a result of that review, there is a concern that the variation is not contemplated in the original documentation or might fall outside its general purview, a new guarantee or security should be taken. Where there is no such concern, it is nevertheless good practice to request a guarantee or security confirmation (as applicable), to protect against the point being raised subsequently by the guarantor or chargor.
When it comes to amending finance documents to reflect the transition from an IBOR to an RFR, one of the stated aims of the working groups is that the shift in benchmark rate should have a neutral economic impact. In view of that, to the extent an amendment to the benchmark rate is the only change being made, and the existing facility agreement includes a form of the LMA’s Replacement of Screen Rate wording or equivalent, it is strongly arguable that the amendment was contemplated in the existing documentation and does not take the facility outside the general purview of the guarantee or security. It will be interesting to see the degree to which borrowers and sponsors in the various markets push back if the cautious approach referred to above – taking a new guarantee or security if there is a concern, and confirmations if there is not – is proposed, given the inevitable time and cost implications, whether lenders are prepared to take a view on the point with the sheer volume of amendments needed, and whether borrowers and sponsors refuse to pay the costs.
There Is No “One Size Fits All”
Ultimately, it is not possible to answer this question generally – each deal will need to be assessed carefully, with the assistance of lawyers from each relevant jurisdiction. In many cases parties may use the opportunity to incorporate other amendments into their documents, not just those relating to IBOR transition, and where that is the case, it will add another complication to the discussion and increase the likelihood that a new guarantee and/or security interest (or confirmation of the existing guarantee and/or security) may be needed. Having said that, if IBOR transition is considered early on in the drafting, it ought to be possible in many cases to future-proof the original documents to minimise the likelihood of needing to take a new guarantee or security, or to seek guarantee or security confirmations, and we already have advised several clients accordingly.