January 4, 2021 - In May 2020, the ARRC published Best Practice Recommendations to help industry transition away from USD LIBOR by its presumed December 2021 cessation date. Then, in November 2020, the Ice Benchmark Administration (“IBA”), the UK Financial Conduct Authority (“FCA”) and the US Banking Agencies released coordinated announcements stating that i) the IBA and FCA would consult on ending most USD LIBOR fixings on June 30, 2023 for legacy contracts only and ii) the US Banking Agencies strongly supported the move. So…do the November 2020 announcements mean that the ARRC Best Practice Recommendations are no longer relevant? Not at all.
In fact, on December 18, 2020, the ARRC released updated FAQs and Question 17 specifically asked, “How do the Q4 2020 announcements by regulators and IBA about USD LIBOR’s proposed endgame impact the ARRC’s Recommended Best Practices?” The ARRC answered that “its recommended guidelines are fully consistent with the timelines and message set out in the U.S. supervisory guidance and the IBA and FCA announcements.” Let’s drill into this.
As one might imagine, the alignment between the November announcements and the ARRC date-based best practice recommendations was a hot topic in the ARRC December 9th meeting (per the minutes). Federal Reserve Vice-Chair Quarles and New York Federal Reserve President John Williams presented to the ARRC, reiterating that i) the various announcements lay out a collective framework for ending USD LIBOR, ii) the continued use of LIBOR creates safety and soundness concerns, and iii) there is support for the ARRC’s recommendations and proposed legislation. Then the ARRC turned to the issue of whether the dates in the Best Practice Recommendations still worked.
The ARRC has two best practices for loans that might be impacted by the November 30th announcements. First, the ARRC recommended that new LIBOR loan originations should end by June 30, 2021. Importantly, the Banking Agencies in their statement, suggested that banks “cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021 (emphasis added)”. The ARRC Business Loans Working Group developed the recommendation that LIBOR loan origination end by June 30, 2021 because it felt that was as soon as practicable.Thus, these two positions still are aligned.
Second, the ARRC also recommended that loans start using hardwired fallbacks by September 30, 2020. The Banking Agencies’ statement also notes that, “[n]ew contracts entered into before December 31, 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.” We believe that this language strongly supports the use of hardwired fallbacks in syndicated loans. The bottom line: The November 30, 2020 announcements do give markets time to get their legacy portfolios in order and do reduce the likelihood of a disorderly LIBOR transition. The announcements do not give a reason to delay the work that has been undertaken or to postpone well-considered timelines.