Spanish Spotlight Edition 5: LIBOR, LMA Updates and MiFID II

Welcome to Spanish Spotlight, an update on the Spanish loan market prepared by the English law team in the banking and international finance department of Ashurst Spain. 

Hot Topics

LIBOR

The U.K. Financial Conduct Authority announced last year that LIBOR, the benchmark rate produced for five currencies (including Euro), will be discontinued at the end of 2021.  Insufficient volume in the interbank borrowing market and a reluctance from some participants to provide data following the string of scandals that thrust the benchmark rate into the limelight during the financial crisis means that there is not enough data for the benchmark to be priced.  Attention is now focussed on finding a suitable alternative to the rate that is widely used to price financial products around the world.  

As yet, no alternative has been advocated by the LMA or other similar bodies but it is likely to be the derivatives market that take the lead on this.  Commentary around the issue suggests a movement towards the so-called risk free reference rates, with the Sterling Overnight Index Average (SONIA) being suggested as an alternative in the UK.  However, this benchmark rate is backward-looking, reflecting bank and building societies´ overnight funding rates, whereas LIBOR is forward-looking.  The impact of a change to a backward-looking rate would need careful analysis both from a documentation and an operational perspective.  In addition, as the rate is currency specific there will be a need to co-ordinate the setting of multiple rates in multi-currency facilities and this may create further challenges from a documentation and practical perspective.  We are continuing to monitor changes in the market and hope to provide a further update in future editions of Spanish Spotlight. 

LMA Updates

New fronted agreements for leveraged acquisition finance transactions:

The LMA has launched new forms of (i) a fronted funding and distribution agreement and (ii) a fronted distribution agreement, both for leveraged acquisition finance transactions.  These agreements document arrangements between a group of mandated lead arrangers in relation to the initial drawdown of term facilities and subsequent primary syndication. 

These documents were produced in response to demand from participants in the syndicated leveraged loan market. The two new agreements seek to reflect the two most commonly encountered fronting structures in the European leveraged finance market and, as always, are likely to form the starting point for negotiations.

Changes to secondary debt trading documents:

In September 2017, the LMA published revised versions of the following documents from its secondary debt trading suite to reflect, among other things, recent changes to ERISA:

1. Terms and Conditions, revised with respect to the delayed settlement compensation and settlement calculation, and to reflect recent changes to ERISA.

2. Participation Agreements, revised in relation to the transfer provisions, which now allow the Grantor to carry out its KYC checks on the new participant before being required to sign a Transfer Certificate, and to reflect recent changes to ERISA. 

Additional changes were also made in December 2017 to take account of the discontinuation of LIBOR (as discussed above). These changes provide a waterfall of fallbacks to determine the benchmark rate if any relevant screen rate is unavailable, ultimately resulting in a benchmark rate being set by the Seller if no alternative rate can be agreed. 

The documents are now live and can be accessed here.

MIFID II

A revised version of the EU's Markets in Financial Instruments Directive, known as MiFID II, came into force and became broadly applicable in all member states on 3 January 2018. Building on the reforms of MiFID I, MiFID II creates a framework that attempts to harmonise the regimes governing the conduct of securities business throughout the EU. MiFID II was originally passed in 2014 and member states were given two years in which to implement the requirements. The main goals of MiFID II are (i) increasing the transparency across all asset classes in financial markets, (ii) ensuring greater protection for investors (including non-retail investors), (iii) moving trading in financial instruments onto regulated trading platforms and (iv) restoring confidence in financial markets following the financial crisis.

The burden of implementing MiFID II will primarily be on banks and brokers, but the directive extends to institutional investors, brokers and hedge funds and will likely have a practical implication for most players in global financial markets. Fund managers must consider that anything they buy where the underlying product is listed in the EU will be caught by MiFID II irrespective of where the asset manager is based . The more notable reforms include: increased transparency around bank fees, disclosure of price and volume of trades, unbundling investment research from trading costs and higher product governance standards.  

For further details about the implementation of MiFID II in Spain, you can find a legal update from our Spanish law colleagues here (Spanish language).

To find out more about MiFID II requirements and the impact on high yield bond investors, please see our full note here. 

To further understand the requirements of research unbundling, you can find the Q&A from the European Commission and further analysis from our regulatory team here.