November 29, 2021 - On November 19th, the Federal Reserve issued Supervision and Regulation Letter 21-12 (“SR 21-12”), which answered a number of LIBOR transition questions pertinent to syndicated loans. We flag the critical questions below.
- Question 2: If a loan contract will automatically renew after December 31, 2021, would this be viewed as a new contract? Answer: Yes, the automatic renewal of the loan would be viewed as a new contract because it would extend the term of an existing LIBOR contract (emphasis added). A Board-supervised institution should take steps to address such automatic renewals.
- Question 4 addresses whether any new LIBOR contracts should be entered into after year-end 2021. We flag two that may be relevant to the loan market. Entities may engage in “market making in support of client activity related to USD LIBOR transactions executed before January 1, 2022” and “transactions that reduce or hedge the institution’s or any client of the institution’s USD LIBOR exposure on contracts entered into before January 1, 2022.”
- Question 5: After December 31, 2021, would it be appropriate for Board-supervised institutions to engage in secondary trading of LIBOR-linked cash instruments issued prior to year-end 2021? Answer: Yes, it would be appropriate to engage in secondary trading of LIBOR-linked instruments issued prior to December 31, 2021. LSTA comment: We’ve received a number of questions around whether trading of LIBOR loans would be permissible. We have generally answered that legacy LIBOR loan trading does not increase aggregate LIBOR exposure, it merely transfers ownership and therefore should be permissible. The SR 21-12 should provide comfort to market participants.
- While Question 7 doesn’t directly address loans, it does indicate that the regulators are taking transition seriously. Question: How will examiners assess Board-supervised institutions’ LIBOR transition planning? Will supervisors issue MRAs and take other supervisory actions in connection with the LIBOR transition? Answer: “…Board-supervised institutions that are not making adequate progress toward transitioning away from LIBOR could create safety and soundness risks for themselves and for the financial system. Accordingly, examiners will consider issuing supervisory findings and other supervisory actions if a firm is not making adequate progress.”
Two items of interest to members were not included in the SR letter. First, many members have asked whether extensions in LIBOR under uncommitted lines would be permissible in 2022. The conversations that we have had with regulators have not been encouraging; regulators have generally indicated that they do not consider uncommitted lines to be pre-existing contractual obligations. However, we also know that banks continue to press their case for permitting LIBOR extensions under uncommitted lines to manage the remediation process. To our knowledge, there has been no public guidance on this issue. Second, the regulators have said that they understand that there may be some loans underwritten in LIBOR in 2021 that are not distributed until 2022. While they don’t want a slew of such deals coming, the regulators have said that they understand a few might occur. Again, this was not addressed in the November 19th letter.
Finally, the Fed stated that it will continue to provide LIBOR transition guidance in the SR letters, so we will continue to watch the space.