Contractual recommendations on the disappearance of the Libor rate in financing contracts entered into in Central America

Regional Banking and Finance Team


By virtue of the discontinuation of the Libor rate for one (1) day, one (1), three (3), six (6) and twelve (12) month terms, as of June 30, 2023, as communicated by the authorities in charge[1], banks and other financial institutions worldwide, have decided to modify by means of an addendum, the current interest rate in financing contracts, specifically to introduce a new reference rate as an alternative and thus eliminate the legal risk that in the absence of an agreement in situations such as the present one, the legal interest rate or any other interest rate established by the competent authorities in the respective jurisdictions will apply.

Below, we include a series of general recommendations for parties to financing contracts in the jurisdictions of Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica.


Modification of the current interest clause in Loan and Note Substitution Agreements (Private Sector)

To modify Loan agreements in the private sector only requires the concurrence of the will of the parties. The promissory notes must be replaced if the enforceability of the collection of interest is to be assured. In both cases it is suggested to send a written request to the debtors, explaining the reasons why the modification and/or replacement in question is necessary. If the dialogue becomes complicated, we recommend informing the debtors that you will be invoking the clauses of the specific credit agreement that allow for early termination, when appropriate. It is also recommended that a transition clause be included in the contract modification to mitigate possible future contingencies in the event that the new reference rate is no longer published.

Modification of the current interest clause in Loan and Note Substitution Agreements (Public Sector)

In order to modify the contracts in which Guatemala appears as debtor country, it is not necessary to go to the legislative body, but to the Ministry of Public Finance. This authorization will only be in force for the year 2022 unless the legislator delegates such function to the Ministry of Public Finance again expressly for the year 2023. However, it is necessary to point out that although the Budget Law grants the Ministry of Finance the power to carry out these processes, it does not regulate the manner in which this should be done. As a consequence, we recommend approaching the Ministry, either directly or through an information consultation, to determine the specific procedure to be followed internally and then proceed with the corresponding modifications.

El Salvador

Modification of the current interest clause in Loan Agreements and Substitution of Promissory Notes (Private Sector)

The modification of contracts is permitted by Salvadoran law, to ensure its execution it is advisable that the modification be granted with the same legal formalities with which the original contract was granted (for example, that it be granted in a public deed or authenticated private document). On the other hand, the modification of the interest rate in a promissory note requires the substitution of the title as such, for which reason it is recommended that the existing promissory note be exchanged for the new promissory note, as well as the destruction of the old promissory note. In both cases it is necessary the appearance of the debtor and the creditor, it is important to verify the existence of the corporate authorizations for the subscription of the modification of the credit agreement and the new promissory note.

Modification of the current interest clause in Loan Agreements and Substitution of Promissory Notes (Public Sector)

The modification of contracts in the public sector is also possible by applying the same rules as suggested for the private sector. It is of the utmost importance to verify the existence of an authorization for the signing of the new promissory note modification, such authorization must follow the same formalities as the original authorization (e.g., authorization through the Legislative Assembly or the Board of Directors for municipalities).


Modification of the current interest clause in Loan and Note Substitution Agreements (Private Sector)

The modification by bilateral agreement of the totality of the documents related to the obligation represents the ideal scenario. No legal consequences would be foreseen.

It is advisable to consider establishing alternative reference rates not only to support the substitution in question, but also to provide ample options to allow for a satisfactory agreement in the creditor-debtor relationship.

In accordance with the above considerations, and even though several banks have been adopting supplementary provisions for the future adoption of a new reference rate to govern their loan contracts, the best solution is the definitive adoption of a new reference rate acceptable and beneficial to the banks, with which their credit relations can flow in the best way with their borrowers. As a result of several studies and recommendations from the world’s financial authorities, the SOFR reference rate has been the most widely proposed rate for the financial markets of the American continent.

Given the current scenario, it should be determined for each specific credit operation, if there is any contractual provision that allows or serves as a basis for approaching the borrower, and then a formal communication should be sent to the borrower to initiate discussions regarding the need to establish by mutual agreement a new reference rate for the credit contract or for the respective Promissory Note. In general, all contracts provide that contractual modifications must be agreed upon in writing between the parties. In the case of lines of credit, these changes can be agreed upon more easily, as the interest rate is agreed upon as part of the disbursement request process, since the interest clause establishes that the interest rate will be agreed upon at the time of the disbursement process.

Modification of the current interest clause in the Loan and Substitution of Promissory Notes Agreements (Public Sector)

Pursuant to Article 205 paragraph 36 of the Constitution of the Republic of Honduras, the National Congress is responsible for approving or disapproving loans or similar agreements related to public credit entered into by the Executive Branch. In order to contract loans abroad or those which, although agreed in the country, are to be financed with foreign capital, it is necessary that the respective project be approved by the National Congress.

The basis for this constitutional power of the National Congress is the controlling function of this representative body with respect to the content and purpose of the loan contract and the management of public finances.

With respect to contractual modifications, Article 67 of the Organic Budget Law establishes that:

“The Public Debt may be subject to consolidation, conversion, renegotiation or any other readjustment mechanism that is convenient to the national interest, insofar as it means more favorable financial conditions.

The renegotiation of loans and other public credit operations shall be the exclusive power of the Secretariat of State in the Office of Finance and the Central Bank of Honduras, as the case may be, and may only be carried out based on the prior recommendation of the Public Credit Commission and must be reported to the National Congress”.

When analyzing what is described in Article 67 of the Organic Law of the Budget, loans may be modified following the corresponding administrative process with the obligation to inform the National Congress, only in those cases in which the contractual modifications imply more favorable financial conditions. In other words, if the substitution of the Libor rate to an alternative reference rate implies more favorable financial conditions for the State, and this is reflected in the corresponding opinions of SEFIN and the Central Bank, the financing contracts may be modified between the parties following the administrative process only.


Modification of the current interest clause in the Loan Agreements and substitution of Promissory Notes (Private Sector)

Modifications in private sector loan contracts are allowed, only the will of the parties is needed to make them, they must be made under the same modality of the main contract (appearance of the same parties, in the form of a public deed or private contract, etc.). It is recommended to make a detailed inventory of the credits agreed with LIBOR rate that will continue to be in force after the expiration date in order to notify and explain to the opposing party about the situation and request the modification of the contract. In case there are existing promissory notes, these must be replaced by a new one in which the conditions agreed with the new reference interest rate that will replace LIBOR are detailed. It is important to mention that in Nicaragua promissory notes do not have executive merit, but some financial institutions use them as support for the disbursement of credit lines.

Modification of the current interest clause in Loan Agreements and substitution of Promissory Notes (Public Sector)

In the case of the Public Sector, the process of approval by the Nicaraguan National Assembly for contract modifications must be considered. Therefore, it is recommended to estimate a longer period of time for this process than in the Private Sector, due to the authorizations involved. However, it is recommended to follow the same process of inventory taking and notification to the counterparty. Once the pertinent authorization has been obtained, the interest clause can be modified in the same way as the initial contract was agreed upon and the promissory note can be substituted for a new one with the applicable reference interest rate according to the modification of the contract.

Costa Rica

Modification of the current interest clause in Loan Agreements and substitution of Promissory Notes (Private Sector)

An addendum must be signed between the parties, whereby the substitution of the initially agreed interest rate for the substitute rate is agreed upon. It may also be worthwhile to include complementary provisions, such as definitions that support the eventual understanding and identification of the new interest rate, particularly if it is not yet well known in the local environment. In addition, it may be prudent to include a clause regulating the eventual disappearance or unavailability of the new reference rate agreed between the parties. Regarding the replacement of the Promissory Note, a new one should be issued including the new interest rate agreed between the parties; that is to say, the existing promissory note should be replaced by a new one containing the reference to the new agreed rate.

Modification of the current interest clause in Loan Agreements and replacement of Promissory Notes (Public Sector)

Unless the original contract initially authorized by the Legislature contains provisions that allow agreeing to a substitution of the reference interest rate, any change to an essential condition of a loan contract entered into by a public law entity, such as the change of the reference interest rate, shall require the prior approval of said branch of the Republic.