Jennifer has acted for bid consortia, sponsors, commercial lenders, governmental entities,  sellers and purchasers of infrastructure assets and multilateral and export credit agencies, advising clients on project, construction and finance documentation in the UK, Europe, CIS, Africa and the Middle East.

GAP aims to stimulate private sector investment in renewable power generation in Africa, financing approximately 270MW of new renewable energy generation capacity.

Main News

• We take a look at the possible effects of a LIBOR 2 on project financings
• Trinity publishes major paper with UN Economic Commission for Africa
• Three of Trinity’s renewables transactions reach financial close

Article – 150 shades of LIBOR

In our article this month, new joiner Andrew Gray takes a look at the possibility of a reformed LIBOR and how it could lead to higher and more volatile lending rates.  We consider what should be done now to insulate projects from any adverse consequences.

New joiner

We welcome Andrew Gray to the Trinity team.  Andrew is a senior lawyer who advises clients on transactional matters in the energy, infrastructure and mining sectors.  In recent years, Andrew’s practice has focused on upstream oil & gas and power generation (including gas-to-power and renewables) in emerging markets, with a particular focus on African projects.   Andrew is a member of the Association of International Petroleum Negotiators.  Prior to joining Trinity, Andrew was a partner at Gowlings (UK) LLP, having previously worked in the London offices of Clyde & Co LLP and Freshfields Bruckhaus Deringer LLP, where he qualified as a solicitor.

Closed deals

In the last few months, we have closed or signed documentation in relation to the following transactions:

• Trinity acted on the largest renewables project financing to date in Romania, advising EP Global Energy alongside its co-funding equity partners, Marguerite Fund and Enercap Power Fund I.  The EUR91m funding package was led by EBRD, Erste Group, Unicredit Bank Austria and ING Bank.  Trinity advised EP Global Energy throughout the project’s development, including bringing in the new equity participants as well as arranging the debt financing package from the legal side.  The deal marked the first substantial infrastructure project on which the firm could apply its private equity capabilities, led by Hugh Naylor.  The equity arrangements completed shortly before the financing was signed.  The project and finance team comprised of Patrick Leece, Kaushik Ray and was led by Paul Biggs.
• Trinity advised a major South African bank in relation to the development of the 65MW Hopefield Wind Farm, developed by Umoya Energy (Pty) Ltd, in the first round of the renewable energy procurement programme in South Africa.  Trinity is currently advising lenders on a number of South African renewables transactions in the programme, split between the various phases.  Hopefield is the first of these to reach financial close.   The team on the Hopefield project was led by Patrick Leece and Simon Norris.
• Trinity advised a major South African bank in relation to the development of the 75MW solar PV plant, developed by Scatec Solar.  The team on the Scatec Solar project was led by Patrick Leece and Simon Norris.
• Trinity advised DEG and KfW, the German development finance institutions (“DFI”), as well as the Emerging Africa Infrastructure Fund on the US$310m refinancing of the Olkaria III geothermal power plant in Kenya.  DFI lenders’ original project finance loan was refinanced by Overseas Private Investment Corporation (OPIC), an agency of the United States Government.  DFI lenders were advised by Kaushik Ray and Simon Norris.
• Trinity advised three major development banks on their private sector loans in Namibia to help improve access to finance and open doors to education. Trinity advised lenders on all aspects of the financing arrangements for loans totalling ZAR 165 million to Trustco Finance to support its student lending program in Namibia.  These financing arrangements are expected to enable Trustco Finance to provide more than 10,000 new micro-loans to Namibian students to further their education at Trustco’s distance-learning education institution, the Institute for Open Learning. Lenders were advised by Kaushik Ray.

In addition, in the past few months, Trinity:

• advised a major African bank on the closing of the financing for the refurbishment of a major West African airport;
• advised a UK-based fund on its joint venture arrangements concerning a telecoms receivables financing business;
• advised a private equity fund on its second-rounding funding of an East African agriculture business;
• advising shareholders on the buy-out of a minority shareholder in a UK solar business;
• advised a major African bank on the acquisition of a Nigerian petroleum industry services company; and
• advised a European trade finance bank on a refinanced loan to an Azeri oil major.

New instructions

We have been instructed on the following new matters in the past few months:

• advising, alongside a consortium of law firms, on the development of a major infrastructure project in Central America;
• advising potential equity investors into a wind farm in Kenya;
• advising a private equity fund on its acquisition of a West African healthcare business;
• advising an investor on the acquisition of shares in a West African mining business;
• advising a major African bank on a mining-related financing in Sierra Leone;
• advising the project company in relation to a large solar IPP in Ghana;
• advising the Government of Uganda and the utility in Uganda, UETCL, in relation to the development of standard form power purchase agreement and implementation agreement which can be applied to smaller hydro-power projects in the country; and
• advising an oil shale development company in respect of acquiring an Australian company and related transactions to acquire mineral exploration rights in Queensland.

Apart from the above, we continue to work day-to-day on transactions in Sierra Leone, Ivory Coast, Kenya, Ghana, Mozambique, Ethiopia, Rwanda, Mauritius, South Africa, Zambia, Madagascar, Uganda, Tanzania and Nigeria as well as in the UK, Azerbaijan, Croatia, Bosnia-Herzegovina, Central America and Romania.

Trinity rated in Legal 500 2012

The latest edition of Legal 500, published in September 2012, rates Trinity within Finance: emerging markets; Projects, energy and natural resources and Infrastructure.   Simon Norris, Paul Biggs, Patrick Leece and Kaushik Ray are all listed as “recommended lawyers”. Trinity remains the only boutique law firm to be rated in any of these sectors in Legal 500.

Publications

• The October 2012 edition of Corporate Livewire’s Expert Guide: Foreign Investment features a chapter, “Diligencing Transactions in Sub-Saharan Africa” written by Hugh Naylor, Head of Private Equity at Trinity International LLP.
• The September 2012 edition of Financier Worldwide included an article entitled “Developments in Sub-Saharan Africa Private Equity Funds”, also written by Hugh Naylor, Head of Private Equity at Trinity International LLP.
• Trinity was appointed by the United Nations Economic Commission for Africa to deliver a report entitled “Building Public-Private Partnerships to scale up resources for Climate-Friendly Investment in Africa”.  The report was published in November and formally presented at the 2012 session of the African Union Conference of Energy Ministers of Africa.  The report draws on Trinity’s first-hand experience on successfully advising in relation to renewables transactions in Africa that have reached financial close and makes a series of policy recommendations, consolidating input from the report’s stakeholders (including the UN, African Development Bank, World Bank Group, other lenders, governments and private sector developers).  On the Trinity side, the report was written by Paul Biggs, Ana-Katarina Hajduka and Kaushik Ray.  A link to a copy of the report will be emailed under separate cover.

Getting in touch

As ever, if you have any comments or questions about Trinity, about Focus, or generally, please get in touch.

You can follow us on Twitter @TrinityIntLLP.

In the wake of the widely reported LIBOR “rate-rigging scandal”, the UK Government commissioned Wheatley Review of LIBOR was published in final form on 28 September 2012.  It suggests a comprehensive reform of LIBOR.

In this article, we suggest that any reformed LIBOR (referred to as “LIBOR 2” below) could lead to higher and more volatile lending rates, and consider what should be done now to insulate projects from any adverse consequences.

What is LIBOR?

The London Interbank Offer Rate (LIBOR) is currently used as a reference benchmark in transactions worth over $300 trillion.  Although administered by the British Bankers Association (BBA), a trade association for the UK banking and financial services sector, it is currently unregulated.

On each London business day, LIBOR rates are calculated by Thompson Reuters for 15 maturities (from overnight to one year) in each of 10 currencies, i.e. there are 150 LIBOR rates.  For each currency a panel of banks is asked:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am? ”

The highest and lowest quartile of responses are discarded, and the average of the middle quartile is used to create a “shaved mean”.

Wheatley Review Recommendations

The Wheatley Review acknowledges that replacing LIBOR “would pose an unacceptably high risk of significant financial instability”, and instead suggests a comprehensive reform of LIBOR.  In this sense LIBOR is (or at least the most widely used LIBOR rates are) likely to continue in existence.  Any reform is unlikely to require, nor give parties to LIBOR based transactions the right to require, renegotiation of lending or related hedging documents.

The proposed reforms include:

Regulation: Introducing statutory regulation of LIBOR.

Introducing a New Administrator: Replacing the BBA with a new LIBOR administrator.

Use of Actual Transaction Data: Requiring submitting banks to use data from actual transactions, with individual submissions to be externally audited and published after 3 months.

Reducing Number of LIBOR benchmarks: Reducing the number of LIBOR benchmarks from 150 to 20 rates.

Encouraging Bank Participation: Giving the UK Financial Services Authority, “an express “reserve” power to compel LIBOR submissions”.

Given the high profile of this matter in the UK and abroad, swift reforms along the lines suggested by the Review are likely.  HM Treasury has stated:

“It is the [UK] Government’s intention to respond to the review when Parliament returns [15 October], and introduce any necessary legislation in the Financial Services Bill that is currently being considered by the House of Lords.”

Structural Level of LIBOR

In standard floating LIBOR loan documentation, interest rates are set at LIBOR + Margin (+ Mandatory Costs).  LIBOR is intended to compensate the lenders’ cost of funds; however, banks making LIBOR submissions are currently asked a subjective question (see above).

In relation to LIBOR’s European cousin, EURIBOR, where admittedly a slightly different question is asked of submitting banks, the Economist Newspaper recently stated:

“The biggest banks in Italy and Spain generally estimate the cost of borrowing euros for a year at about 1.1%. This rate is much lower than the 4% and 5% their governments (and ultimate guarantors) pay to borrow for the same period. … “The reference to EURIBOR is completely useless for Italian banks,” says Giovanni Sabatini, the managing director of the Italian Banking Association. “EURIBOR is less than 1% and our banks are paying 350-400 basis points above EURIBOR.”” ^[i]

At the time of writing, 3 month USD LIBOR is under 35bp.  We query whether this represents the true cost of funds to banks in the interbank market, and suggest that wider margins can be used to compensate any difference between quoted LIBOR and banks’ actual cost of funds.

Assuming that any LIBOR 2 will be based on submitting banks’ actual cost of funds in the interbank market, it may well be structurally higher than existing LIBOR.

LIBOR Volatility

In his remarks to the European Parliament on 24 September 2012, the Chairman of the US Commodity and Futures Trading Commission, Gary Gensler, asked:

“Given that markets are volatile, why is LIBOR so stable?”

Gensler’s remarks include evidence for 14 banks, comparing each bank’s credit default swap rate (an indicator of market perception of the bank’s creditworthiness) against the same bank’s LIBOR submissions (the bank’s own estimate of its borrowing costs).  Although results vary for each bank, the relatively smooth lines of LIBOR submissions for each bank are in marked contrast to, and often unperturbed by, volatility in the same bank’s CDS rates.

On the assumption given above, we believe that any LIBOR 2 will be structurally more volatile than existing LIBOR.

Market Disruption

Many LIBOR based loan facilities will include a definition of “Market Disruption Event” which includes:

“Market Disruption Event means … the Agent receives notifications from a Lender or Lenders (whose participations in a Loan exceed [x] per cent. of that Loan) that the cost to it of obtaining matching deposits in the Relevant Interbank Market would be in excess of LIBOR.”

The consequence of lender(s) invoking market disruption is that for each Lender LIBOR is replaced by:

“… the cost to that Lender of funding its participation in that Loan from whatever source it may reasonably select…”.

A lender invoking market disruption on the basis of its own borrowing costs would ordinarily incur significant adverse reputational consequences; however, the introduction of any LIBOR 2 could give lenders a plausible justification for doing so.  Most facility agreements will include a “yank the bank” provision allowing borrowers to replace a lender which invokes market disruption, and these provisions will give borrowers well needed comfort during any transition to LIBOR 2.

Suggestions for Borrowers/Projects

• Review Hedging: In preparation for the possible introduction of LIBOR 2, LIBOR based Borrowers should review their interest rate hedging arrangements.
• Take Care with LIBOR Definitions: It is more important than ever that the definition of LIBOR in loan facilities precisely matches the equivalent definition in related hedging documentation.
• Discuss with Lenders: Borrowers currently negotiating facility agreements should discuss this issue with their proposed lenders.  Questions to ask include whether the proposed lenders currently fund themselves at  (or below) LIBOR, and what would happen if LIBOR 2 introduced a structurally higher rate?
• Prepare for Change: Borrowers may wish to review the market disruption provisions in their LIBOR based loan facilities, and consider contingencies in case the provisions are invoked.  To the extent of any unhedged LIBOR based borrowing, Borrowers should stress test their models against potentially significant increases in LIBOR.

If you wish to discuss any of the issues raised in this article, do not hesitate to contact Simon Norris, Kaushik Ray, Andrew Gray or your usual contact at Trinity International LLP.