Finally, LIBOR’s End is Certain. Are You Ready?

On March 5, 2021, the UK Financial Conduct Authority (“FCA”) announced that USD LIBOR will end or no longer be representative after the dates specified below:

This announcement coincided with the feedback statement published the same day by the ICE Benchmark Administration (“IBA”) announcing the results of IBA’s December 2020 consultation on stopping USD LIBOR publication on the dates above.  The IBA stated that, in the absence of panel bank support and without intervention by the FCA to compel panel bank submissions, IBA would no longer have the necessary data to calculate USD LIBOR on a representative basis beyond the dates above.  In its announcement, the FCA made clear that it will not compel panel banks to continue submissions or require IBA to publish LIBOR on the basis of panel bank submissions beyond the dates above.

With respect to 1-, 3- and 6-month USD LIBOR, the FCA indicated that, as the transition away from USD LIBOR progresses, the FCA would continue to consider the case for using proposed regulatory powers to require continued publication of a “synthetic” LIBOR (i.e., a rate based on a changed methodology). However, the FCA also made clear that any such synthetic would no longer be representative of the underlying market after June 30, 2023.  The purpose of creating a synthetic would be to reduce market disruption for tough legacy contracts that cannot be converted to an alternative rate.  It would not be intended for new contracts.

The FCA and IBA announcements are consistent with IBA’s 2020 consultation, which was welcomed by US financial regulators and the Alternative Reference Rates Committee (“ARRC”).  We do not expect the FCA or IBA announcements to change recent regulatory guidance that US financial institutions transition away from LIBOR by the end of 2021.  

Uncertainty regarding how and when LIBOR would end has garnered much attention.  With the end dates now certain, attention should now shift to transition and replacement rates, a necessary but dreaded topic for many.

What is the immediate impact of the FCA and IBA announcements under the ARRC recommended fallback language?

The ARRC “Benchmark Replacement Adjustment” will now be fixed.

All variants of the fallback language recommended by the ARRC contemplate a preferred replacement rate of some form of SOFR plus a spread adjustment--the “Benchmark Replacement Adjustment.”  The ARRC spread adjustment (which matches ISDA’s spread adjustment) is based on a historical median over a 5‑year lookback period calculating the difference between USD LIBOR and SOFR.  As confirmed by the ARRC on March 8, 2021 in frequently asked questions (the “ARRC FAQs”), the relevant 5-year period now will be fixed at the 5 years preceding the FCA and IBA announcements.

A “Benchmark Transition Event” has occurred for business loans, floating rate notes and securitizations. 

As confirmed by the ARRC FAQs, under the ARRC fallback language for business loans, floating rate notes and securitizations, the FCA and IBA announcements constitute a “Benchmark Transition Event.”  A Benchmark Transition Event signals the beginning of the replacement process, but, in this case, does not trigger an immediate transition to the replacement rate.  Under the ARRC language, the rate replacement occurs on the “Benchmark Replacement Date,” which, now that the Benchmark Transition Event is known, will be the applicable end date listed above (assuming no further regulatory changes in end date) or, in the case of business loans that include an early opt-in election, the date specified in accordance with the early opt-in language if the option is exercised.¹ 

Prompt notice to the borrower and syndicate lenders is required for business loans (bilateral and syndicated loans, amendment and hardwired approaches).

Under the ARRC fallback language for bilateral and syndicated business loans, including both the amendment and hardwired approaches, a Benchmark Transition Event triggers a required notice to the borrower and syndicated lenders, if applicable.  The lender, in the case of bilateral loans, and the administrative agent, in the case of syndicated loans, must “promptly” notify the borrower and syndicated lenders, if applicable, of the occurrence of a Benchmark Transition Event and its related Benchmark Replacement Date.  In the case of bilateral loans using the ARRC amendment approach, prompt notice of the “Benchmark Transition Start Date,” which is the 90th day before the Benchmark Replacement Date (unless the parties chose a different period when adopting the ARRC language) is also required.  Under the ARRC amendment approach, in the absence of an early opt-in election, no amendment implementing the LIBOR replacement can become effective prior to the applicable Benchmark Transition Start Date.

Parties should review bespoke fallback language.

No notice requirements are included in the ARRC fallback language for floating rate notes and securitizations, but any parties using bespoke language for those products or for bilateral or syndicated business loans should review their fallback language for similar notice requirements.

What is the immediate impact of the FCA’s announcement on ISDA Derivatives?

ISDA published guidance on March 5, 2021 related to the FCA’s announcement and treatment of that announcement under ISDA’s IBOR Fallbacks Protocol and IBOR Fallbacks Supplement.  As noted above, the ISDA spread adjustment will become fixed by today’s announcement.  Also notable, under the protocol and supplement, the rate for the 1-week and 2-month USD LIBOR tenors after December 31, 2021 will be determined by interpolating between the next longer tenor and the next shorter tenor. 

Other LIBOR Announcements

The FCA also announced on March 5, 2021 that the final publication or representativeness date for all EUR, CHF, Spot Next, 1-week, 2-month and 12-month JPY LIBOR, and the overnight, 1-week, 2-month and 12-month sterling settings will be December 31, 2021.  For the remaining sterling and Japanese yen settings, the FCA will consult on creating a non-representative synthetic that would continue for some period beyond 2021.

Hunton Andrews Kurth’s multi-disciplinary LIBOR transition client service team is available to assist clients navigating this crucial transition.  For further information, contact Tina Locatelli, Kimberly MacLeod or Amy McDaniel Williams.
 

¹ As noted by the ARRC FAQs, ARRC-recommended fallback language for floating rate notes and securitizations requires linear interpolation of 1-week and 2-month USD LIBOR after December 31, 2021 based on USD LIBOR tenors that continue to be published through June 30, 2023.