Welcome to this edition of our Banking & Finance eBulletin. As usual we cover a range of topics relevant to asset based lenders, banks, financial institutions and their customers.
The forecast of the end of LIBOR has made headline news, but what will replace it? Amongst others the LMA and the new trade association, UK Finance will no doubt be involved in the debate.
Brexit is a continuing topic. This time we look at its effect on loan agreements. One of its other effects may be to encourage UK exporters to look for a wider international market and so it is encouraging that the UN has endorsed the ICC Uniform Rules for Forfaiting.
Nearer at home we look at plans to update security over cars and other goods and at a case relevant to the monitoring of property developments by surveyors for banks.
Included in this eBulletin;
- Benchmark reform – the end of LIBOR;
- the LMA and the ACT;
- UK Finance – the new representative of the banking and finance industry;
- Brexit - potential implications for loan agreements;
- UN endorses ICC Uniform Rules for Forfaiting (URF 800);
- Mortgages of cars and other goods;
- Development finance - monitoring surveyors and lenders.
If you want any further information please email your usual contact at DMH Stallard or Gwen Godfrey
Partner, Head of Banking & Finance
+44 (0) 1293 60 5551
Benchmark reform – the end of LIBOR
The Financial Stability Board published its report on interest rate benchmark reform in July 2014. The FCA is overseeing the reform of LIBOR. On 27 July 2017 its Chief Executive delivered a speech indicating that LIBOR is not likely to be available after 2021. He encouraged market participants to develop alternative benchmark rates and to ensure that agreements which will extend beyond 2021 have fallbacks to allow for a smooth transition.
LIBOR underpins the documentation of a variety of financial products, from loans to bonds and other securities. Existing documents do have fallback mechanisms, which generally contemplate the use of an alternative, but similar rate, calculated on a similar basis. It is difficult to see how robust fallback language can be developed now before the alternative benchmark rates have been developed.
As with previous changes, such as the introduction of the Euro, perhaps there will need to be an combination of fallback language and a capability on the part of a limited number of parties (such as the Borrower and the Agent and/or the Majority Lenders in a syndicated loan agreement) to agree on any necessary amendments nearer the time.
The LMA and the ACT
The Loan Market Association (LMA) regularly updates its standard form documents and guidelines which are used as the basis for documenting a wide variety of transactions by lenders and their advisors. Perhaps less widely known is the Association of Corporate Treasurers (ACT) Borrower’s Guide to the LMA’s Investment Grade Agreements.
This guide was first published after the launch of the LMA’s first standard form facilities agreements, its investment grade agreements, in 1999. The guide’s most recent edition was published earlier this year.
Amongst other things it looks at the more recent changes to the LMA templates and other issues which borrowers and their advisers might wish to consider – for example Brexit, benchmark reform, negative interest rates and floors, and sanctions provisions. For more details see the ACT’s website www.treasurers.org/LMA.guide-2017.
UK Finance – the new representative of the banking and finance industry
Most of the activities of the former Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association have been combined and are now carried out by the new trade association UK Finance which was launched in July 2017.
As a result UK Finance represents nearly 300 of the leading firms providing banking, finance, markets and payments–related services in or from the UK. It intends to push for the UK to retain its position as a world leader in financial services, ensuring that customers can access market-leading and innovative products and services in an environment hostile to fraud and resilient to cyber-crime. For more information see its website: www.ukfinance.org.uk
Brexit - potential implications for loan agreements
Whilst the UK’s formal exit from the EU is looming, it is important to remember that at present, the position has not changed. Until such time as the UK formally leaves the EU, it remains a full member and continues to have unfettered access to the single market.
In assessing priorities, in the short term lenders may wish to monitor and evaluate any information or monitoring covenants to understand where business priorities lie for their borrowers. Borrowers should be evaluating their business demands to identify any potential breaches in their existing loan agreements. A particular focus should be given to financial covenants as these may have been triggered if the business has been affected by commercial, political or economic uncertainty.
For new facilities, there are no material changes that need to be made but it may be that when the UK has formally left the EU changes need to be made, for example to clauses addressing VAT, increased costs, and/or conflict of laws amongst others. In practical terms, lenders may want to look at tightening their covenant controls to account for the timescale for the withdrawal from the EU but this would need to be assessed on a borrower focused, circumstantial basis.
UN endorses ICC Uniform Rules for Forfaiting (URF 800)
The URF 800 have been officially endorsed by the United Nations Commission on International Trade Law (UNCITRAL). The URF 800 are the first global rules for forfaiting which have been developed by the International Chamber of Commerce (ICC) and the International Trade and Forfaiting Association (IFTA).
Forfaiting is a trade finance technique traditionally based on the without recourse discounting of a negotiable instrument representing receivables due to an exporter. It is now used as receivables financing in relation to a wide range of payment claims or debt obligations of importers or banks and financial institutions in relation to international trade transactions.
It is hoped that the UN’s endorsement of these new rules will encourage the banking and exporting communities to adopt them more widely for the without recourse financing of international receivables. Amongst other things this should help small and medium sized enterprises to access finance to enable them to trade internationally.
Mortgages of cars and other goods
In July 2017 the Law Commission published a consultation on the draft clauses of the proposed Goods Mortgages Bill. Goods mortgages would replace the rather archaic bills of sale which are currently the way in which individuals can use goods they own (such as cars) as security for loans.
The draft bill contains detailed provisions dealing with various aspects such as the types of goods which could be subject to the mortgage, the obligations which could be secured, and the powers of the mortgagee.
It does not contain the details of how and where goods mortgages would be registered. There will be a separate consultation on registration late in 2017. For further details on this Bills of Sale Project see the Law Commission website www.lawcom.gov.uk.
Development finance - monitoring surveyors and lenders
A recent case provides guidance as to the role and duties of monitoring surveyors when preparing reports to lenders at the outset of a development project. It also offers a very useful reminder of the importance of document control (Bank of Ireland v Watts Group Plc  EWHC 1667 (TCC),  All ER (D) 91 (Jul)). Following the liquidation of a developer, Bank of Ireland brought a claim in negligence against Watts, the monitoring surveyor employed by the Bank in relation to a residential development. The Bank alleged that, had Watts properly produced its “Initial Appraisal Report”, the Bank would never have lent funds to the developer. Amongst other things, the Bank alleged that Watts had failed to report that the proposed scheme departed from the planning permission. This part of the Bank’s claim failed because it was unable to demonstrate which documents it had sent to Watts.
Had the Bank been able to demonstrate that it had sent documents to Watts showing that the proposed scheme had departed from the planning permission, the Court would have found that Watts had been negligent in failing to report this issue. Even so, because the Bank was already aware of this issue, it appears unlikely that the Bank would have been able to demonstrate that Watts had caused it to suffer loss.