Key developments for Banking & Finance and the potential implications for 2022
It has been another strange year for us all as we continue to deal with the ongoing effects of the global COVID-19 pandemic and adjust to varying forms of “new normal”...
That has been no different in the Banking & Finance world as the beginning of the year saw the continuation, and then finalisation, of a number of government-backed loan schemes (such as the Coronavirus Business Interruption Loan Scheme) which was then quickly followed by the introduction of other such schemes (such as the Recovery Loan Scheme).
In addition, there have been a number of interesting developments across the Banking & Finance landscape which may have been easily missed or overlooked in such a rapidly-changing environment.
Accordingly, we have set out below some of the key developments across the Banking & Finance sector in 2021 along with the potential implications of such developments for lenders and borrowers alike coming into 2022.
The escalation of the transition away from LIBOR propelled in 2021 with its cessation due for the end of the year which we had previously commented on late in 2020 here.
One of the key takeaways, from a UK perspective, is that the government have handed the FCA powers under the Financial Services Act 2021 allowing it to stop the use of new benchmark rates (or change in its methodologies). The FCA has therefore introduced one, three and six-month LIBOR to be published under a new methodology from the end of 2021 – Term SONIA/TONA. This ‘new’ methodology cannot be used in new contracts, but may be used in the majority of legacy contracts referencing LIBOR.
Implications for Lenders and Borrowers
The measures introduced above help current financing arrangements by ensuring there is “drop-dead date” for all transitions at the end of 2021. However, it only affords a temporary solution since the FCA does not guarantee the adjusted-LIBOR methodology will be published after 2022.
The FCA, along with many other organisations such as the Loan Market Association, continue to drive the need of actively transitioning away from LIBOR and have implied that if financial institutions are relying too heavily on the adjusted-LIBOR methodology then it may take action to restrict such firms from using this in an effort to reduce their LIBOR referencing portfolios.
Accordingly, lenders will need to be alert to the above and we will no doubt see more facility arrangements that utilise alternative reference rates coming in to 2022, whether that be to the likes of a central bank rate (i.e. Bank of England), a lender’s variable rate or risk-free rates (e.g. Sterling Overnight Index Average (SONIA) in the UK).
Covid-19 & Rent Arrears
Perhaps unsurprisingly, Covid-19 triggered updates in the context of rent arrears across the UK. Government-imposed retail closures since March 2020 had the impact of increasing landlord claims for rent arrears and service charges, since some tenants in the retail sector were unable to pay such amounts in lockdown.
In a case against TFS Stores Limited in April 2021, the court held that the tenant was obliged to pay rent arrears and the service charge despite the tenant’s defences underpinned by the government’s enforced closure of their retail unit at the time. Similar decisions in favour of landlords followed in the months to come, much to tenants dismay.
However, later in 2021, the government published The Commercial Rent (Coronavirus) Bill (Bill). The Bill ring-fences certain rent debts and creates a new binding arbitration scheme, granting tenants relief from such debt provided that certain conditions are met (e.g. that they were obliged to close their premises and they lease such premises under a business tenancy). The Bill is expected to be passed into law by March 2022.
Implications for Lender and Borrowers
The Bill is likely to be of interest to a significant amount of real estate finance transactions which rely on the payment of rent to service debt. The Bill may be damaging to a number of landlords as the new scheme appears to be more favourably weighted to the tenant since it gives them the ability to be granted relief from their contractual obligation to pay rent where the circumstances of the Bill apply. Therefore, landlords may want to seek to reach an agreement with their tenant(s) now to prevent the scheme becoming applicable in 2022. In contrast, tenants may wish to delay until the Bill is passed into law to take advantage of the arbitration scheme afforded.
Accordingly, it follows that lenders of such real estate finance transactions should be alert to the potential implications of the Bill and the likely effects that may follow from March 2022 onwards.
National Security And Investment Act 2021
The above act (NSI 2021) comes into force on 4 January 2022 which gives the government wide powers to intervene in certain acquisitions that may pose a national security risk. We have recently reported on the NSI 2021 in full detail here.
Implications for Lenders and Borrowers
The impact of the NSI 2021 is likely to be of relevance to a number of acquisition finance transactions. In instances whereby the acquisition falls within the NSI 2021 regime, a mandatory notification may need to be made and clearance sought from the Secretary of State prior to the acquisition completing.
Whilst the NSI 2021 includes some comfort for lenders that the likes of loans are unlikely to pose a national security risk, each matter must be taken on a case-by-case basis. Accordingly, on such transactions, lenders may seek additional comfort in their finance documents (e.g. in respect of representations, warranties and undertakings) that the borrower has complied fully with the provisions of the NSI 2021.
With regards to a lender taking security in these circumstances, it is currently questionable as to whether enforcement of such security may trigger a mandatory notification requirement (or a call-in notice) under the NSI 2021. For example, if clearance has been required for the acquisition in question being funded (and secured), a lender needs to be alert that enforcement of such security may also need to follow the same NSI 2021 clearance if ever enforced (especially with the likes of share charges).
Pension Schemes Act 2021
The above act (PSA 2021) came into force on 1 October 2021. This has potential implications for lenders whereby the borrowing entity has a defined benefit pension scheme (DBS) which is operated within a group.
The PSA 2021 strengthens powers given to the Pensions Regulator to intervene in the event of a DBS being put at risk to meet certain obligations to its members. These powers introduce, amongst other things, civil fines (of up to £1m) and new criminal offences punishable by imprisonment (and/or unlimited fines).
Implications for Lenders and Borrowers
Under the PSA 2021, it is arguable that lenders, as well as the DBS employer, could incur liability under the legislation. For example, if the lending or taking of security from a borrowing group with a DBS could weaken its financial position, the provisions of the PSA may come into play.
Taking security (and the potential enforcement of such security) will therefore require additional consideration when a DBS is involved. This is of particular relevance in respect of share charges whereby the lender can become ‘connected’ with the DBS employer since, on enforcement, it will likely have the ability to exercise certain voting powers at general meetings of the borrowing entity.
The Pensions Regulator has issued guidance in November 2021 around, amongst other things, its likely enforcement actions in respect of the PSA 2021. This guidance does provide lenders with some comfort in that the Regulator indicates that ‘reasonable commercial activity’ should not be stifled.
Given the above, it almost goes without saying that the introduction of the PSA 2021 makes it even more important that a lender’s due diligence on the pension position of a potential borrower group is undertaken and, if a risk is identified, that appropriate protections are included within the finance documents (e.g. under representations, warranties and undertakings), as well as seeking clearance if there is an obvious issue in the context of the PSA 2021.
Get in touch
For more information on this update, please contact Sean Halliwell.
Our Banking & Finance team provide commercial advice on bilateral and syndicated transactions to lenders and borrowers, both domestic and international.