With only ten months before the phasing out of the London Interbank Offered Rate (“LIBOR”), The transition efforts should be well underway. In this newsletter, we discuss the ICE Benchmark Administration (the “ZICO“) and / or the Financial Conduct Authority (the”FCA“) expected announcement of the official LIBOR shutdown, and underline the changed timelines for the transition from LIBOR to another risk-free rate (“RFR”) Recommended by the relevant working groups.
1. Expected LIBOR Cessation Announcement
On January 25, 2021, the administrator of LIBOR, the IBA, concluded its consultation on the potential termination of LIBOR settings (the “”IBA consultation“). The IBA intends to cease publication of (i) all EUR, CHF, JPY and GBP LIBOR maturities and 1 week and 2 month USD LIBOR maturities on December 31, 2021, and (ii) overnight, 1, 3, 6 and 12 month USD LIBOR maturities on June 30, 2023. The USD LIBOR maturity extension is intended for existing (i.e. existing) agreements, not new loan agreements. The actions of the IBA are subject to the legislative capacity of the FCA to require the IBA to continue to publish any LIBOR parameters.
Now that the consultation period has passed, an announcement from the IBA (and / or the FCA) regarding the termination of LIBOR seems imminent. The announcement can confirm that the LIBOR parameters defined in the IBA consultation will cease on the dates mentioned therein, thus constituting a trigger for permanent ceasing under the Alternative Reference Rates Committee (the “”ARRC”) Hardwired fallback language (and amendment). Alternatively, the FCA may announce that it will consult on the continued publication of any LIBOR parameters based on a modified methodology, commonly referred to as “synthetic” LIBOR, thereby indicating that LIBOR will no longer be representative after a given date. This would not constitute a pre-cessation trigger, since the pre-cessation trigger under the ARRC fallback language requires a declaration of non-representativeness and not a declaration that LIBOR will be non-representative to the to come up. A third possibility is that the IBA’s announcement is less firm, for example than the IBA waits the termination of LIBOR parameters on the dates set in the IBA Consultation, which would not constitute a triggering event either.
If the announcement is a termination or pre-termination trigger, the spread adjustments for the applicable RFR would be calculated and set on that day. However, the actual fallback to an RFR would only occur on the day the applicable LIBOR parameter is no longer specified, and not on the day of the announcement. The FCA has predicted that it is likely that an announcement covering all LIBOR parameters will be made on the same day, rather than multiple announcements.
Depending on the wording of the fallback language in a particular loan agreement, if the announcement is a triggering event, the administrative agent of a syndicated facility may need to notify affected parties of the announcement. Parties to a loan agreement may also be required to begin amending the loan agreement to include the applicable fallback rate.
2. It is recommended to cease new issuance of LIBOR loans in the first half of 2021
Relevant working groups in both the UK and the US have recommended that new issuance of LIBOR-linked loans cease in the first half of 2021.
In the United Kingdom, the Working Group on Sterling Risk Free Reference Rates (the “British task force“) set the following timelines: (i) by the end of the first quarter of 2021, lenders should cease issuing new GBP LIBOR-linked loans with maturities beyond 2021; (ii) by the end of the first quarter of 2021, lenders must identify old GBP LIBOR contracts which expire after the end of 2021 and which can be converted and convert these loans by the end of the third quarter of 2021; and (iii) by the end of 2021, parties should be fully prepared for the end of GBP LIBOR.
Similar timeframes have been recommended in the United States. ARRC’s milestones for syndicated and bilateral loans include stopping issuance of new USD LIBOR loans by June 30, 2021. The milestone for the incorporation of hard-wired backup solutions for such loans passed in the fall of 2020.
3. Points to remember for lenders
Lenders should focus their efforts on (i) incorporating hardwired backup language or RFRs into new loan agreements and (ii) revising the backup language into existing loan agreements. For existing loan agreements that use overnight, 1, 3, 6, and 12 month USD LIBOR, lenders should consider due dates beyond June 30, 2023 and strive to incorporate hard-wired fallback language or RFRs in these loan agreements.
With respect to syndicated loans, the administrative officer should be familiar with the notice requirements in existing loan agreements regarding LIBOR termination announcements. The administrative agent and lenders should also keep in mind that such announcements may trigger modification requirements in loan agreements. Note that the ARRC has recommended that if a loan agreement specifies that one or more parties have the discretion to select a replacement rate for USD LIBOR, those parties should disclose the forward RFR and any related spread methodology at least. 6 months before the entry into force of the replacement rate.
The end of LIBOR is approaching at an increasingly rapid rate, and all market participants who rely on LIBOR should take proactive steps to prepare for the transition to an RFR. We will continue to monitor the phase-out of LIBOR and provide further updates as developments occur.