August 3, 2017 - As conversations around LIBOR alternatives continue, the FT reported on Wednesday that “the death of Libor may be exaggerated, particularly in US markets” despite the market buzz following last week’s speech by the Chief Executive of the U.K.’s Financial Conduct Authority (FCA). The FCA has announced it will no longer require banks to submit quotes for LIBOR rates in sterling by the end of 2021, but that does not mean that ICE could not continue to publish the dollar rate.
For the US market, it is important to remember that $350 trillion of financial products reference LIBOR. Therefore, an orderly and phased transition to a new rate is paramount, and one that may require more than a five-year horizon. (Our earlier LIBOR analysis is available here.)
Of particular importance to LSTA members is the impact on the $4 trillion syndicated loan market. If LIBOR were discontinued, how do credit agreements read today? As described in The LSTA’s Complete Credit Agreement Guide, definitions of “LIBOR” customarily provide for fallbacks in case the LIBOR screen rate is unavailable. These range from the use of an interpolated rate to an offered quotation rate to first class banks for deposits in the London interbank market by the Agent or a designated bank, to a rate determined on the basis of quotes from designated “reference banks”. Moreover, credit agreements customarily provide a “market disruption event” clause as a second fallback, which includes a trigger event entitling lenders to suspend making loans at interest rates calculated by reference to LIBOR, and when triggered, all loans otherwise bearing interest calculated by reference to LIBOR become base rate or prime rate borrowings. (Admittedly, these fallbacks were designed for temporary disruptions rather than the discontinuation of LIBOR.)
So, how might market participants begin to prepare for a transition? At this point, parties drafting credit agreements should pay particular attention to LIBOR fallback provisions and the ability to amend agreements to address the discontinuation of LIBOR. Clifford Chance published a helpful client alert outlining key considerations for NY law governed credit agreements and indentures. The key step in this process will be the market’s ultimate selection of a new rate (the Broad Treasury Financing Rate (BTFR) recommended by ARRC or some other alternative rate). In absence of that knowledge, it is too early to select an alternative benchmark rate in current credit agreements. The LSTA will remain engaged on this issue and, as a new reference rate is developed, will work with our members to facilitate an orderly transition to the new rate and develop appropriate language for credit agreements.