Recent statements by LIBOR authorities in the UK have implications for benchmark fallbacks in US documents.
The UK’s Financial Conduct Authority ("FCA") and ICE Benchmark Administration ("IBA") released statements1 on March 5, 2021 announcing that LIBOR will cease to be published on a representative basis on:
- December 31, 2021, for one-week and two-month USD LIBOR (and all tenors of GBP, EUR, CHF and JPY LIBOR); and
- June 30, 2023, for all other tenors of USD LIBOR (i.e. overnight, one-month, three-month, six-month and 12-month).
Though the end of LIBOR has been anticipated for years, the importance of these statements is that they constitute a triggering event in the most common formulations of USD LIBOR fallback provisions. This trigger doesn't mean that loans based on USD LIBOR need to imminently switch to another rate, but certain actions will still be required under many loan documents.
For syndicated loan documents that include fallback provisions recommended by the Alternative Reference Rates Committee ("ARRC"), the ARRC has confirmed that these recent statements amount to a "Benchmark Transition Event".2 This occurrence does not cause a switch to a non-LIBOR benchmark under the ARRC-recommended provisions, but rather triggers certain notice requirements and, in the case of the "amendment approach," permits the administrative agent and borrower to commence the fallback amendment process.
The specific rights and requirements arising under the two ARRC-recommended fallback formulations for syndicated loans include the following:
- ARRC "amendment approach":
- The administrative agent must "promptly notify" the borrower and lenders that a Benchmark Transition Event has occurred.
- The administrative agent and the borrower "may" proceed with an amendment to replace USD LIBOR. There is no promptness or other timing requirement, except that replacement cannot occur prior to the "Benchmark Transition Start Date" (which is defined as a pre-agreed date-usually 90 days-prior to actual rate cessation).
- ARRC "hardwired approach"
- The administrative agent must "promptly notify" the borrower and lenders that a Benchmark Transition Event has occurred
- Replacement of LIBOR will automatically occur, pursuant to the hardwired waterfall of replacement rates, upon actual rate cessation.
However, each loan agreement will need to be reviewed to determine whether it follows the ARRC-recommended fallbacks in these respects, or if it includes altered or alternative fallback provisions that dictate different notification requirements, timing standards or other actions that may need to be taken in light of the recent statements.
With respect to the derivatives market, the International Swaps and Derivatives Association ("ISDA") has confirmed that the March 5 statements constitute an "Index Cessation Event" under transactions that incorporate Supplement number 70 to the 2006 ISDA Definitions (either directly or through the ISDA 2020 IBOR Fallbacks Protocol). The occurrence of such an event serves as the date for fixing the spread adjustment that will be applied to account for the historical difference between USD LIBOR and SOFR (among other interbank benchmark rates and their respective "risk-free" replacements) in these ISDA-governed derivatives. Therefore, ISDA's spread adjustments have now been finalized (based on the median difference between corresponding tenors of the applicable rates for the five-year period ending March 5, 2021) and published by Bloomberg. And because the ARRC has already indicated that its recommended spread adjustments will use the same values as ISDA, the adjustments to be used for business loans with ARRC "hardwired approach" fallbacks have also effectively been fixed. Though these spread adjustments are now settled, they will only apply once replacement of USD LIBOR actually occurs pursuant to the applicable fallback.
Despite providing a definitive timeline for the end of USD LIBOR, the statements did note that the FCA will consider (in conjunction with US regulatory authorities and other stakeholders) whether to require IBA to publish certain tenors of USD LIBOR on a "synthetic," non-representative basis after June 30, 2023. The FCA is also considering a similar approach for certain tenors of GBP and JPY LIBOR. However, the statements made clear that such measures would be intended to support only those "tough legacy" contracts that have no fallback and are difficult to amend, and that the potential availability of such rates should not otherwise impact the transition away from LIBOR. It remains to be seen whether US regulators will issue similar guidance to restrict usage of any "synthetic" LIBORs in the US market, if such rates are indeed made available.
For additional information and resources on the LIBOR discontinuation and transition, you can visit White & Case's LIBOR Hub.
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