Following on from my recent article in relation to LIBOR cessation and matters to be considered from a PPP perspective, the UK Infrastructure and Projects Authority (“IPA”) has today (11 October 2021) published a guidance note entitled “Discontinuation of LIBOR – applied to PFI Projects”. The purpose of the IPA’s guidance note is to provide an update to procuring authorities in relation to the looming cessation of LIBOR (31 December 2021) and updates previous guidance published in February 2021 and July 2021.
Summary of Guidance Note
The guidance note:
- provides some background to the LIBOR cessation and guidance on what SONIA is (i.e. the UK’s risk free rate which is to replace LIBOR);
- sets out guidance and various matters procuring authorities should consider in relation to the transition; and
- provides some illustrations and deals with FAQs. There is also a style consent letter for consenting to a LIBOR transition but this is for guidance only and is not a substitution for a proper review of a project’s specific project agreement and review of the specific project circumstances in relation to the LIBOR transition.
Use of Synthetic LIBOR
The guidance note recognises that PPP/PFI financial products (e.g. the senior loan agreement/any heeding arrangements) may be designated/interpreted as “tough legacy” and therefore qualify to use synthetic LIBOR i.e. a modified form of LIBOR which will apply temporarily from January 2022. However, the UK Financial Conduct Authority is still consulting on its proposed decision on which contracts will be permitted to use synthetic LIBOR therefore this will need to be kept under review by project SPVs. In any event, synthetic LIBOR is only to be a temporary measure and reliance should not be placed on this long term as a fallback. If however synthetic LIBOR is used temporarily on a PPP project, the position will be that there will be no contractual change to the funding agreements and therefore no refinancing will occur as synthetic LIBOR is to be treated as continuation of LIBOR.
Some Key Recommendations
The guidance note makes some key recommendations, some of which are as follows:
- SPVs should lead on the transition with their funders and Authorities should be reactive rather than proactive and not look to impose any particular course of action on SPVs;
- the unitary charge should be unaffected (and other project agreement provisions) and there shouldn’t be any refinancing gain leading to a qualifying refinancing so long as the SPV is subject to the same new benchmark rate on both its loan and hedging arrangements;
- Authorities should generally consent to the transition (if consent is required) after receiving appropriate information from the SPV and also avoid linking their consent to the resolution of any other commercial matters that may be outstanding between the parties on the basis the transition is largely regulatory and administrative in nature (this is of course subject to the specific project circumstances/documents and assumption that there is no refinancing gain and/or increase of an Authority’s liabilities on early termination or otherwise);
- Authorities should seek external advice if they are being asked to accept any additional risks or liabilities arising out of the transition but other than that minimal external advice should be required if parties follow recommended industry practice, guidance, and market standard documentation and SPVs should meet the cost of any advice.
Procuring authorities (and indeed SPVs) will no doubt welcome this guidance from the IPA as the LIBOR cessation deadline looms ever closer. However, the usual caveat remains and each project will need to be assessed on an individual basis with regards to the underlying project and finance documents and specific circumstances of the transition.