Since the cessation of the widely-used LIBOR benchmark has become a realistic prospect, due to the UK Financial Conduct Authority’s announcements that it will stop supporting this benchmark at the end of 2021, the question of what will take its place has become a hot topic for lenders and lawyers drafting credit agreements.
Currently, within the EU (including in Bulgaria), art. 28, par. 2 of Regulation (EU) 2016/1011 – commonly known as the “Benchmark Regulation” – requires banks to have alternative benchmark plans and reflect them in their credit agreements. As a result, benchmark replacement clauses have become standard in credit agreements – but there are particularities that need to be borne in mind when dealing with Bulgarian borrowers. In this respect it is worth noting that according to the most recent questions and answers published by the European Securities and Markets Authority regarding the Benchmark Regulation, contractual relationships within the EU are governed by national contract law and, accordingly, the legally adequate reflection of alternative benchmark plans may vary among EU member states. Bulgarian legislation in this respect was adopted in 2018 to address the practical issues arising from the discontinuation by the Bulgarian National Bank of the interbank-offered-rate for the Bulgarian national currency (called SOFIBOR). This legislation, however, was drafted expansively; it is not restricted to the SOFIBOR discontinuation alone, but is instead applicable to any benchmark replacements for the purposes of credit agreements when Bulgarian law applies. Parties to credit agreements are generally free to choose a non-Bulgarian system of law to govern their relations (traditionally English or New York law) but such a choice may not displace Bulgarian overriding mandatory rules and Bulgarian public policy laws as per the EU Rome I Regulation. Thus, foreign lenders would be well advised to incorporate certain clauses in credit agreements with Bulgarian borrowers to address the risk that specific Bulgarian benchmark replacement rules will be classified as overriding mandatory rules or part of Bulgaria’s public policy.
The main Bulgarian statutory benchmark replacement rule that this article will deal with is the requirement that, “as of the moment” a new benchmark becomes applicable, the new interest rate under the respective credit agreement may not be higher than the rate applicable before the change (the “Interest Rate Restriction Rule”). In the context of SOFIBOR’s discontinuation some local banks/lawyers are interpreting the phrase “as of the moment” to mean that it should apply only for the first interest period (e.g., 1 month, 3 months, etc.) after the “moment” when the benchmark was effectively changed. This makes sense, as the rationale behind the Interest Rate Restriction Rule (deduced from the comments published alongside the draft bill when the rule was discussed in the Bulgarian Parliament) should obviously be a temporary freeze during the interest period running when the benchmark change becomes effective), allowing borrowers sufficient time to refinance their loans and avoid payment of higher interest due to the benchmark change. However, most banks/lawyers have taken a more restrictive approach, insisting that the Interest Rate Restriction Rule imposes a cap on the interest rate after the benchmark change equal to the interest rate amount that was payable before the moment of the benchmark change.
Although often overlooked there is another relevant rule that allows the parties to a credit agreement to deviate from the Interest Rate Restriction Rule by express contractual arrangement. As a result, lenders may avoid the risk of having a cap on the payable interest rate after an interest rate benchmark change by a simple contractual clause displacing the Interest Rate Restriction Rule (although this rule does not apply to consumer credit agreements and consumer mortgage credit agreements). Our client banks have accepted such contractual arrangements easily, and we have not seen much resistance from borrowers when negotiating them.
We remain available to assist those who would like more information about this issue or other important considerations related to the Interest Rate Restriction Rule.
By Tsvetan Krumov, Head of Banking and Finance, Schoenherr Sofia