Will Amending A Facility Agreement To Move From An IBOR To An RFR Require Guarantee And Security Confirmations?

• Published date: 24 November 2020
• Subject Matter: Technology, Security
• Law Firm: Mayer Brown
• Author: Mr Simon Fisher, Ashley McDermott, Stephen Walsh, Sarah Walters and Erica Arcudi

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 documented¹ 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...