LIBOR: The end is nigh
On 5 March 2021, the Financial Conduct Authority (FCA) issued a statement announcing the future cessation or loss of representativeness of 35 LIBOR benchmark settings currently published by ICE Benchmark Administration Limited (IBA). This is a significant step forward in LIBOR's long goodbye and the transition to risk free rates (RFRs) in the loan markets.
In view of the above, the need for financial market participants to transition away from LIBOR is becoming increasingly urgent. This article highlights the impact of FCA's recent announcement on LMA or APLMA style loan documents.
Following FCA's announcement, all LIBOR settings for all currencies will either cease or no longer be representative immediately after the dates set out below.
|No.||LIBOR Settings||Relevant Tenor|
|Immediate cessation after 31 December 2021|
|1.||Euro LIBOR||All seven|
|2.||Swiss franc LIBOR||All seven|
|3.||Sterling LIBOR||Overnight, 1-week, 2-month and 12-month|
|4.||Japanese yen LIBOR||Spot next, 1-week, 2-month and 12-month|
|5.||USD LIBOR||1-week and 2-month|
|Immediate cessation after 31 December 2021 subject to further consultation between the FCA and IBA on publication based on alternative "synthetic" methodology|
|6.||Sterling LIBOR||1-month, 3-month and 6-month|
|7.||Japanese yen LIBOR||1-month, 3-month and 6-month (but note that these will cease in any event after 30 December 2022)|
|Immediate cessation after 30 June 2023|
|8.||USD LIBOR||Overnight and 12-month|
|Immediate cessation after 30 June 2023 subject to further consultation between the FCA and IBA on publication based on alternative "synthetic" methodology|
|9.||USD LIBOR||1-month, 3-month and 6-month
Although the FCA intends to consult on use of its proposed new powers to require IBA to publish certain LIBOR settings on a synthetic basis following 31 December 2021, financial market participants should not assume that they will be able to make use of these rates as they are intended to enable "tough legacy" contracts (i.e. contracts which cannot be renegotiated or amended) to continue. Further guidance may be provided later in 2021 as to which legacy uses of synthetic LIBOR are permissible, but we expect the use of synthetic rates going forward to be limited.
Apart from putting a long stop date to LIBOR's eventual cessation, the FCA announcement may itself be a triggering event for parties to commence negotiations and agree on a replacement benchmark rate for use in their existing loans with maturity beyond the end of 2021. We set out some guidance below as a starting point to assist our readers in determining this question. However the impact of the FCA announcement on a loan documentation would very much depend on the terms of a loan agreement and a careful review of the terms of a loan agreement is advised.
(A) Loan Agreements with Rate Switch Provisions
In September 2020, the Loan Market Association (LMA) released an exposure draft of the multicurrency term and revolving facilities agreement incorporating rate switch provisions (lookback without observation shift) (Exposure Draft). The Exposure Draft is worded in a way that allows parties to the loan agreement to proceed on the basis of forward-looking interbank term rates, with a subsequent switch to backward-looking compounded RFRs upon an agreed backstop date or a rate switch triggering event (Rate Switch Provisions).
Since then, the LMA has updated the Exposure Draft and published the following rate switch agreements on 30 March 2021 to reflect market feedback and changes to the supporting materials to the £RFR Working Group Conventions:
(a) Multicurrency Term and Revolving Facilities Agreement incorporating Rate Switch Provisions (Lookback without Observation Shift); and
(b) Multicurrency Term and Revolving Facilities Agreement incorporating Rate Switch Provisions (Lookback with Observation Shift),
(collectively, the Rate Switch Agreements). These documents provide for certain "Rate Switch Trigger Events". The FCA announcement would qualify as a Rate Switch Trigger Event under these documents.
Any actual rate switch would occur on the earlier of (1) the agreed "Backstop Rate Switch Date"; or (2) the "Rate Switch Trigger Event Date".
The Rate Switch Trigger Event Date is defined to be the first date on which any LIBOR setting in that currency ceases to be published or is no longer representative (see table above). Readers should note that a Rate Switch Trigger Event that applies to one tenor only of a relevant screen rate will trigger a switch to the use of a compounded RFR for all tenors of that screen rate. This means, for example, a Rate Switch Agreement referencing 1-month, 3-month or 6-month USD LIBOR (which should only cease after 30 June 2023 at the earliest) would nonetheless transition on 1 January 2022, since it would be a Rate Switch Trigger Event Date for the purposes of the 1-week and 2-month USD LIBOR settings.
Where parties agreed to an earlier Backstop Rate Switch Date, the rate switch would kick in from that earlier date.
(B) Loan Agreements with Replacement of Screen Rate Provisions
Prior to the Rate Switch Agreements being published, the LMA had produced several versions of "Replacement of Screen Rate" provisions in preparation of LIBOR's eventual cessation. These provisions are generally worded to lower the consent threshold required to effect amendments for the replacement of benchmark rates in loan agreements.
Unlike the Rate Switch Agreements, a "Screen Rate Replacement Event" triggered by one tenor of a screen rate will work to facilitate replacement of the screen rate for that tenor only, as opposed to all of the tenors.
Depending on the version of Replacement of Screen Rate provisions adopted in a particular document, the FCA announcement may not trigger a Screen Rate Replacement Event or, if it does, the relevant provision is likely to provide for a basis for amendments relating to the replacement of benchmark rates to be made, without specifying when and how such amendments would take effect.
(C) Loan Agreements without Replacement of Screen Rate Provisions
Parties may have to rely on fallback provisions to other LIBOR-referenced rates, which is likely to be triggered in cases where "No Screen Rate is available for LIBOR". The default terms in the original version of the LMA document (dating back to pre-2014) would require all lenders' consent before any amendment can be made in relation to the replacement of benchmark rates. It would however be prudent for parties to examine the terms of their loan agreement closely in particular provisions related to amendments of finance documents to determine the requisite level of lenders' consent for such amendment.
Information contained in this article is to provide readers with a general understanding on the impact of FCA announcement on loan documentation and not to be relied upon as legal advice. Parties would be well advised to conduct a thorough examination of the terms of the relevant loan documentation to determine the impact, if any, the FCA announcement has on any particular transaction and to start engaging other parties in discussion to transition to the use of an RFR if this has not already began. If you require any assistance or more information on this, please get in touch with your usual contacts in the Kuala Lumpur office.