An amendment would be required for transitioning documents away from LIBOR referenced rates. It is an equitable principle of Australian law that a variation of the principal contact will discharge a guarantor’s obligations if that variation could prejudice the guarantor, whether or not the guarantor in fact is or has been prejudiced. There are doubts around the extent to which this principle can be wholly ousted by the terms of the guarantee. Additional considerations for particular types of parties (including corporate security providers or guarantors) reinforce that confirmation and consent to changes within the principal contract is required.

Thus, as a matter of invariable good practice, guarantors and other third party security providers should always be asked to provide express consent (ideally, by being party to the amending document itself: see below).

All parties to the finance document which is being amended should be party to the amending document. The amending document should include confirmation of and consent to the amendments from each of the guarantors and security providers.

If guarantors or security providers are not party to the underlying finance document but rather are party to a separate guarantee or security document, they should still be required to be party to the amending document to provide their respective consent and confirmation to the changes made.

Consent and confirmation is sometimes provided via another entity (such as the borrower) pursuant to, for example an “Obligors' Agent” clause but it is preferable for each guarantor and/or security provider to sign the amendment separately. Ordinarily, a basic amendment document for a contract that does not deal with interests in land or security arrangements would not need to be registered or filed with a public authority. If the underlying document being amended is a security trust deed or other trust deed, the amendment can result in a resettlement of trust property and the parties may incur a liability for stamp duty. Specific legal advice should be obtained in this circumstance.

A change to the (referenced) interest rates may constitute a novation under Belgian law with the risk that security does not extend to the novated contract. It is therefore advisable to have the parties confirm the continuance of the security interests and/or guarantees upon the amendment and not rely only on the construction language and/or other (novation) provisions which may be contained in the relevant security agreement and/or guarantee.

The security and/or guarantee confirmation can be included in either a Belgian law confirmation letter or agreement, or in the foreign law (amendment) agreement. It is recommended to deal with this under a Belgian law confirmation document.

Check the construction language and the description of secured obligations in the finance documents. If the relevant security document or guarantee extends to all liabilities due from time to time under the finance documents as they may be amended, supplemented and/or restated from time to time, then that security or guarantee would generally not need to be amended following amendments to effect transition of LIBOR to a new interest benchmark.

Market practice in Bermuda would typically dictate that all guarantors and security providers be party to any amendment documentation in order to confirm the guarantees and/or security they have provided.

Check the construction language of the security or guarantee documents and the security filing forms. If the relevant security document or guarantee extends to all liabilities due from time to time under the finance documents as they may be amended, supplemented and/or restated from time to time, then that security or guarantee would not need to be amended following amendments to effect transition of LIBOR to a new interest benchmark.

Market practice dictates that all guarantors and security providers be party to any amendment documentation in order to confirm the guarantees and/or security they have provided. In addition, corporate approvals to enter into the documents must be obtained.

Check the construction language and the description of secured obligations in the finance documents.

If a finance document is referenced in a guarantee or security document, without specifying that it is “as amended, restated, supplemented or otherwise modified from time to time”, the meaning of the incorporation by reference is ambiguous. A court may, depending on the drafting, interpret the incorporated document as being frozen in time when it was incorporated by reference, especially if a subsequent amendment did not involve all the original contracting parties.

If the security or guarantee refers to the finance document(s) as “amended, restated, supplemented or otherwise modified from time to time”, then the security or guarantees would extend to secure and/or guarantee the debt obligations as so amended, restated, supplemented or otherwise modified without the need for further action. However, in practice whenever a finance document is amended, restated or supplemented, even where proper construction language is used, it is best practice to obtain confirmations or reaffirmations of guarantee and security from the relevant guarantors or loan parties.

In the Province of Quebec, any amendments made to reflect to the transition from LIBOR to a risk-free rate in the principal finance document (for instance, any credit or facility agreement) would not in and of itself require additional security to be granted under Quebec law or amendments to the existing Quebec security so long as the security refers to such finance document “as amended, restated, supplemented or otherwise modified from time to time.

There may be other reasons for taking new security in the Province of Quebec as a result of certain amendments made to the finance document (such as a novation of the underlying debt obligations resulting from, for instance, a change in the borrower or the lender). In addition, in cases where the Quebec security is amended and the security was initially granted by way of a notarial deed of hypothec, then the amendment to the security may also need to be signed by way of a notarial deed.

Check the construction language and the description of secured obligations in the finance documents. If the relevant security document or guarantee extends to all liabilities due from time to time under the finance documents as they may be amended, supplemented and/or restated from time to time, then that security or guarantee would not need to be amended following amendments to effect transition of LIBOR to a new interest benchmark.

Market practice would typically dictate that all guarantors and security providers be party to any amendment documentation in order to confirm the guarantees and/or security they have provided.

Check the construction language and the description of secured obligations in the finance documents.

Written consent of the security provider or the guarantor is required if an amendment results in an increase in the secured liabilities. Currently, there are no clear precedents or laws specifically explaining whether it would be considered as an increase in secured liabilities when the interest benchmark changes from LIBOR to a replacing one. Generally speaking, the court will focus on the actual result of the secured liabilities caused by the change in interest rate, instead of considering the intention between the lender and the borrower, even though in the case of LIBOR transition, there is no deliberate transfer of economic value between lender and borrower. However, it is difficult to tell whether the phase-out of LIBOR will increase or decrease the secured liabilities at the outset, especially when the replacing interest benchmark might be floating as well. Unless it is absolutely certain that the changes are not going to increase the secured liabilities, it is advisable to always get the written consent of the security provider or the guarantor so as to make sure that the security or the guarantee will cover the liabilities as amended.

In terms of any cross-border financing that constitutes foreign debt (which should be registered with State Administration of Foreign Exchange (SAFE) at the outset), replacement of the applicable interest rate is a major chance to the contractual terms and follow-up change registration should be made in respect of this.

In terms of any cross-border security or guarantee that has been registered with SAFE then the replacement of the interest rate should also be registered with competent SAFE branch.

Check the definition of secured obligations in the finance documents.

Case-law and learned legal commentary have previously determined that a modification of the interest rate of a loan would not be considered to fall into the category of a novation, but would constitute a simple modification of the calculation of the debt . It is therefore reasonable to think that amendments made to transition away from LIBOR would similarly be considered as a change to the calculation of the debt obligations and as such should not constitute a novation of the debt obligations. Therefore, existing security or guarantees would continue to secure the existing debt obligations unless the amendments also effected an increase to the debt obligations.

However, it would be recommended in any event to obtain a confirmation from a guarantor or security provider that their existing security or guarantees are intended to continue to secure the debt obligations following the change to a new interest benchmark.

To prevent the unlikely event that transition away from LIBOR would be considered as a novation, it is recommended to check that specific reservation provisions¹  are already included in the initial draft of the existing security or guarantee and, if this is not the case, to obtain such reservation of rights at the time of the transition away from LIBOR.

Certain security interests must be filed on public registers when created and if the original filing references LIBOR the registration should be updated.

Certain security documents may refer directly to the applicable benchmark in the security document itself. In such case, it would be necessary to amend the security document itself (a simple confirmation of such existing security would not be sufficient in that case).

1. Article 1334 of the French civil code allows for the creditors parties to a security to « reserve » the benefit of such security in the event of a novation (under certain conditions) by including a specific wording directly into the security. As for instance, with a security guaranteeing a financing under LIBOR, it means that the creditors, in the event that the transition would be considered as a novation, would retain the benefice of the existing security but only within the existing limits such as fixed in consideration of the original obligation. The reservation wording could also be added concomitantly of the time of the transition away from LIBOR (with the existing security provider consent). The provisions on security reservation are important provisions since if the novation is realized without the security reservation wording, this automatically leads to the extinction of the original security, and no subsequent agreement could restore their effectiveness.

Check the construction language and the description of secured obligations in the finance documents. In case no such wording is included, further action to cover any potential extension of the secured obligations is required in relation to third party security interests provided that the rate change might result in an increase of the secured obligations. In case such wording is included, it remains best practice to do a security confirmation for third party security interests.

In cases where the change might result in a subsequent extension of the secured obligations, it is best practice to at least confirm the relevant third party security interests, even if the security documents are expressed to cover any future extension of the secured obligations. Whether or not LIBOR transition amends would be considered “a subsequent extension of the secured obligations” is a question of matter of fact, i.e. if the calculation of the new base rate compared to the calculation of the existing base rate results in a higher interest rate than the original base rate, than it is an increase. If not, it’s not an increase.

There are two ways to deal with the security interests confirmation under German law:

• The first option is to enter into confirmation agreements pursuant to which the parties confirm, that the original security document continues to secure the (potential) extension of the secured obligations resulting from the amendment to the finance documents. This is usually the most cost efficient way.
• The second option distinguishes between accessory and non-accessory security interests. In the case of non-accessory security interests (i.e. assignment, security transfers, land charges and guarantees), the security documents are amended to confirm the amendment of the secured obligations. In the case of accessory security interests (i.e. mortgages, pledges and sureties), a new junior ranking security interest is granted. This option is more costly, in particular in the case of share pledges in limited liability companies which trigger notarial fees. New hardening periods will apply to the new security interests. In addition any perfection requirements in relation to accessory security interests (most notably notices under account and share pledge agreements) will need to be made.

Check the construction language and the description of secured obligations in the finance documents. If the relevant security document or guarantee extends to all liabilities due from time to time under the finance documents as they may be amended, supplemented and/or restated from time to time, then that security or guarantee would not need to be amended following amendments to effect transition of LIBOR to a new interest benchmark.

Market practice in Guernsey would expect all guarantors and security providers to be party to the amendment documentation to confirm the guarantees and/or security they have provided.

Check the construction language and the description of secured obligations in the finance documents.

Existing security or guarantees will extend to secure or guarantee the debt obligations as amended provided that the security or guarantee contractually extends to obligations under the finance documents as amended; and the amendments to the calculation of interest are intended to be economically equivalent.

However, it is recommended where possible to obtain a confirmation from any guarantor or security provider whenever a finance document is amended. It would be a matter of risk assessment for lenders to decide whether such a confirmation is necessary by reference to the facts at the time the nature of the amendment and the terms of the documents.

Check the construction language and the description of secured obligations in the finance documents. If the relevant security document or guarantee extends to all liabilities due from time to time under the finance documents as they may be amended, supplemented and/or restated from time to time, then that security or guarantee would generally not need to be amended following amendments to effect transition of LIBOR to a new interest benchmark.

As a matter of good practice all guarantors and security providers to be party to any amendment documentation are expected to confirm the guarantees and/or security they have provided. If the amendments extend also to an increase in liabilities in the underlying finance documents (including contingent liabilities under any guarantees), care must be taken to ensure that it is possible to make such amendments without such amendments having the effect to discharge the guarantee and release any guarantor from its liabilities.

Check the construction language and the description of secured obligations in the finance documents. If the relevant security document or guarantee extends to all liabilities due from time to time under the finance documents as they may be amended, supplemented and/or restated from time to time, then that security or guarantee would not need to be amended following amendments to effect transition of LIBOR to a new interest benchmark.

Market practice in Jersey would expect all guarantors and security providers to be party to the amendment documentation to confirm the guarantees and/or security they have provided.

Check the construction language and the description of secured obligations in the finance documents. It is key to check whether there is an express construction clause in the Luxembourg law security or guarantee stating that references to the underlying secured finance documents mentioned therein are to those agreements as may be amended, supplemented and/or novated from time to time. In this case, the security/guarantee would not need to be amended.

The Luxembourg law security or guarantee may also provide that neither the security provider’s or guarantor's obligations, nor their rights, powers and remedies granted to the secured creditor by any finance document are discharged or otherwise affected by any amendment or novation of any secured obligations under the finance document(s).

If the Luxembourg law security or guarantee agreement does not contain satisfactory construction provisions as described, then the security or guarantee should be amended to include them.

Each situation should however be analysed on a case-by-case basis.

Check construction language and description secured obligations.

Where finance documents are amended to transition away from LIBOR referenced interest rates, security or guarantees governed by Dutch law, given in support of the debt obligations under those finance documents, extend to secure and/or guarantee the debt obligations as amended provided the security and/or guarantee contractually extend to obligations under the finance documents as amended.

It is recommended to obtain a confirmation from the security provider and / or guarantor whenever a finance document is amended.

Check the construction language and the description of secured obligations in the finance documents. If the relevant security document or guarantee extends to all liabilities due from time to time under the finance documents as they may be amended, supplemented and/or restated from time to time, then that security or guarantee would not need to be amended following amendments to effect transition of LIBOR to a new interest benchmark.

The creditor should seek a written reaffirmation of the security or guarantee from the security provider/guarantor.

Where finance documents are amended to transition away from LIBOR referenced interest rates, security would extend to secure the debt obligations as amended without further action.

For guarantees: amendments to finance documents that may extend the scope of a guarantor’s liabilities would require the express consent of the guarantor in order to be effective against it, either by being party to the amendment document, or by separate confirmation.

If the guarantor is a party to the facility agreement and the guarantee is incorporated within that document, the amendments to facility agreement related to LIBOR transition would need to be signed for the guarantor as well in order to document its consent for such amendments (due to the general rule that amendments to a document need to be agreed by all parties).

If the guarantee is given under a standalone document, the guarantor should be required to sign a confirmation that it agrees to the amendments to finance documents which may extend of the scope of guarantor liabilities.

In both cases, the amendment or a confirmation may be signed on behalf of the guarantors by the lead borrower acting as obligors’ agent (the finance documents should provide for an express authority for it to do so). It is best practice, to include a guarantee and security confirmation in each case the finance documents are amended (however fundamental are the amendments);

While it would be possible for a guarantor to consent in advance to extension of its liabilities as a result of amendment to the finance documents, such consent may be revoked before the amendments in question are actually executed (unless an end-date of such blanked consent is specified); therefore, the market practice is to rely on ad hoc confirmations.

Most security interests available under Polish law need to specify the maximum cap on the amounts that can be secured against a particular secured asset. For this reason, any amendments that increase the amount of the secured liabilities under the finance documents would require the security documents to be amended to reflect this.

Where the type of security interest is required to be registered with a public register, any amendments to the security documents should also be registered.

Check the construction language and the description of secured obligations in the finance documents.

Individual analysis on a case by case basis is required, but, provided the usual interpretation and construction provisions are included in the finance documents, if no other amendments are being made to the finance documents and there is no significant economic value transfer as a result of the transition away from LIBOR, then no further action is strictly necessary in relation to security or guarantees where amendments are made to the finance documents to effect transition from LIBOR to an alternative interest benchmark.

It would however be prudent in order to protect the lender's position to seek written confirmation of security from any security provider or guarantor confirming that the security or guarantee are intended to extend to all the secured obligations under the amended finance documents.

Security documents or guarantees should be amended and the consent of the counter parties obtained to the amendments made to the finance documents in view of the LIBOR transition.

Under the laws of Seychelles, amendments should be made by way of a supplemental deed or amended and restated agreement which should be filed with the Registrar if the original security has been registered.

Check the construction language and the description of secured obligations (or equivalent definition) in the finance documents.

Existing security documents or guarantees should extend to secure or guarantee the secured obligations as amended provided that the security document or guarantee contractually extends to obligations under the finance documents as amended; and the amendments to the calculation of interest are intended to be economically equivalent.

However, it is recommended where possible to obtain a confirmation from any guarantor or security provider whenever a finance document is amended. It would be a matter of risk assessment for lenders to decide whether such a confirmation is necessary by reference to the facts at the time, the nature of the amendment(s) and the terms of the documents.

Check the construction language and the description of secured obligations in the finance documents.

The security or guarantee should be expressed to secure debt obligations incurred in relation to the finance document(s) as from time to time amended and/or restated. If this is the case, it will not be necessary to retake security provided the change of reference rate is intended to result in an equivalent interest charge. If no such wording is included the security might need to be confirmed/retaken (not entirely clear under Swedish law).

Check construction language and description secured obligations.

Security or guarantees governed by the laws of Switzerland, given in support of the debt obligations under those finance documents, extend to secure and/or guarantee the debt obligations as amended without further action if there is construction language and a reference to amended finance documents as set out below.

Construction language should express that finance documents refer to the finance documents as from time to time amended and/or restated. The security or guarantee should be expressed to secure debt obligations incurred in relation to the finance documents as from time to time amended and/or restated.

Note, however, that it is customary and strongly recommended to obtain a security confirmation from the relevant security provider or guarantor in order to avoid any discussions at a later stage. On a more general note, it is recommended to review each finance document to assess and discuss the approach that should be taken in relation to the existing Swiss security or guarantees.

As a matter of Turkish law, documentation for certain security interests must reference the interest rate applicable to the relevant secured debt. The most common preferred security interests required to include interest rate references are:

• (i) mortgages over land or right of construction (üst hakkı); and
• (ii) commercial enterprise pledges (ticari işletme rehni).

These security interests must be filed on public registers when created and in general, applicable interest rates reference LIBOR plus an applicable margin. When those LIBOR referenced interest rates are updated in loan documents, the associated security documentation will also need to be updated. In the case of a mortgage agreement, the relevant changes should be executed before the title deed registry by all of the original parties. In order to amend a LIBOR reference rate in a commercial enterprise pledge agreement, an amendment agreement must be executed before a notary public and the agreement must be registered with the relevant trade registry. In neither case will the amendments restart any security hardening periods.

In addition to updating the interest rate references where required in the security documents, the construction language and description of secured obligations in any security document or guarantee should be reviewed to check that the security or guarantee extends to the finance documents following any amendment for LIBOR transition. If that is not the case, the parties should consider:

• (i) requiring the security provider or guarantor to execute a confirmation protocol to evidence their acceptance that the security or guarantee extends to the debt obligations under the amended underlying facility agreement; or
• (ii) amending the relevant security document or guarantee to cover the secured obligations in the underlying facility agreement following the interest rate changes.

It is good practice in any event to require a security or guarantee confirmation protocol even if the original security or guarantee documents are drafted to envisage amendments to the underlying facility agreement.

Check construction language and description secured obligations.

Where finance documents are amended to transition away from LIBOR referenced interest rates, security or guarantees governed by English law, given in support of the debt obligations under those finance documents, extend to secure and/or guarantee the debt obligations as amended provided the security and/or guarantee contractually extend to obligations under the finance documents as amended.

It is recommended to obtain a confirmation from a guarantor whenever a finance document is amended.