LIBOR Cessation - the clock is ticking for PPP projects

The clock is ticking in relation to the cessation of LIBOR on 31 December 2021 and the replacement of it in the UK with a risk free rate (RFR) for Sterling (Sterling Overnight Index Average (SONIA)) - quite literally if you go on to the website of the Working Group on Sterling RFRs where there is a second by second countdown. Yesterday (29 September 2021), the UK Financial Conduct Authority published its proposals for the temporary publication of "synthetic" LIBOR settings for legacy contracts that reference the 1-, 3- and 6-month sterling and Japanese yen LIBOR settings. In line with this, it has launched a consultation paper on its proposed decision as to which legacy contracts can use these synthetic LIBOR rates.   

However, synthetic LIBOR will not be published indefinitely and as we hit the end of Q3 2021, the widely suggested target date for converting legacy LIBOR contracts or at the very least having robust fallbacks in place if possible, it is important to make the necessary transition arrangements sooner rather than later to avoid any unwanted disruption.  

All PPP loan agreements based on LIBOR will need to switch to a new RFR and time for negotiation will be required particularly if there are no provisions relating to the replacement of LIBOR. As well as focusing on the loan agreement and the amendments that need to be made to it to reflect the transition to a RFR, there are other key issues that must also be bourne in mind within a PPP context and factored in to overall timescales:

• The impact on the Project Agreement must be carefully considered - many Project Agreements have refinancing provisions which may be triggered by amendments to the finance documents. Project Companies will therefore need to be ready to demonstrate there is no gain as a result of the LIBOR transition to avoid having to obtain an Authority's approval to the amendments. It will also need to be checked that the LIBOR transition does not increase an Authority's liabilities on an early termination of the project. It it does, then Authority consent is likely to be required.
• The wider project documents must also be checked for LIBOR references as, for example, LIBOR is often used to calculate default interest rates. These provisions will therefore require to be updated.
• Financial models will need to be reviewed and updated as necessary to reflect the LIBOR transition. This will include reviewing financial covenants to ensure they are also appropriate post transition.  Finally, financial model reviews will also help assess any Project Agreement implications as referred to above.
• Hedging - many PPP projects will have hedging arrangements in place. Hedging documentation will need to be amended so as to ensure the same benchmark rate is used for the loan and the swap so as to avoid any mismatches in payment streams.