The end of LIBOR

In 2017, the Financial Conduct Authority (FCA) announced that it and the remaining panel banks submitting London Inter-Bank Offered Rate (LIBOR) quotations to the ICE Benchmark Administration (IBA) would commit to supporting the LIBOR-setting process through the end of December 2021 but not beyond that time. The proposal was for LIBOR based rates to be transitioned to a new benchmark rate, which in the US is widely preferred to be the Secured Overnight Financing Rate (SOFR). 

Since the FCA announcement was made, the Alternative Reference Rates Committee (ARRC) released proposed benchmark transition language for credit agreements which currently use LIBOR rates for the transition from LIBOR based rates to SOFR based rates.  The ARRC proposed language released in 2019 included a simplified amendment approach (the Amendment Approach) and a more robust hardwired approach (the Hardwired Approach). The 2019 proposed language for the Amendment Approach and Hardwired Approach for syndicated loans can be found here and for bilateral loans can be found here. The proposed language for the Hardwired Approach was updated in 2020, and can be found here for syndicated loans and here for bilateral loans. 

ARRC proposed benchmark transition language

The Amendment Approach operates by setting out that a lender (or an administrative agent on a syndicated transaction) and a borrower may amend the credit agreement to replace LIBOR with a benchmark replacement rate (which may be a SOFR-based rate) on the occurrence of a trigger event or an early opt-in election. In the case of syndicated loans, this amendment becomes effective five business days after the amendment is posted to the lenders unless they do not accept the amendment.

The Hardwired Approach operates differently from the Amendment Approach.  After a trigger event or early opt-in election occurs, LIBOR is automatically replaced with a benchmark replacement rate. The replacement rate is determined based on a hardwired waterfall.  Following the trigger event, the benchmark replacement will automatically take effect. In the event of an early opt-in election on a syndicated transaction, the benchmark replacement will take effect five business days after notice of the early opt-in election is provided to the lenders, provided the lenders do not object to such election.

FCA and IBA March 5, 2021 Announcements

On March 5, 2021, the FCA and the IBA each published announcements (the March 5th Announcements) with regard to the future cessation of LIBOR publications for all currencies and settings.  The FCA announcement can be found here and the ICE announcement can be found here. For credit agreements that use US dollar LIBOR, these announcements set the dates of the trigger events set out in the ARRC proposed transition language.

The March 5th Announcements confirm that publication of the one-week and two-month US dollar LIBOR settings will cease immediately after December 31, 2021. Publication of the overnight and 12-month US dollar LIBOR settings will cease immediately after June 30, 2023.

In addition to the cessation of the above noted US dollar LIBOR settings, the March 5th Announcements confirm that immediately after June 30, 2023, the one-month, three-month and six-month US dollar LIBOR settings will no longer be representative of the underlying market and economic reality that such settings are intended to measure and representativeness will not be restored. However, the FCA is considering whether to use its powers to compel the IBA to continue the publication of these settings using a changed methodology (known as a “synthetic” basis) beyond such date.

Implications of the March 5th Announcements on credit agreements that use US dollar LIBOR

For credit agreements that use the Amendment Approach for US dollar LIBOR, the March 5th Announcements trigger permissive language allowing the lender (or administrative agent on a syndicated transaction) and the borrower to negotiate and agree on amendments to reflect the transition from US dollar LIBOR to an alternative rate, such as a SOFR based rate.  The ARRC recommended best practice is for the parties to disclose which alternative benchmark rate they plan to select at least six months before the amendment would take effect. The amendment would have to take effect no later than the date upon which the relevant LIBOR setting is no longer published or is no longer representative. In any event, the parties could use the early opt-in election to transition from LIBOR to an alternative benchmark rate.

On March 8, 2021, ARRC published an announcement confirming that in its opinion, the March 5th Announcements constitute a “Benchmark Transition Event” defined under the Hardwired Approach for all US dollar LIBOR settings. For credit agreements that use the Hardwired Approach, the March 5th Announcements do not constitute an immediate trigger event for the transition from LIBOR to the relevant hardwired waterfall rate, but instead set the dates upon which such trigger will take place. The trigger for the automatic transition will occur on the dates upon which the relevant LIBOR settings are no longer published or the dates upon which the relevant LIBOR settings are no longer representative. In any event, the parties could use the early opt-in election to transition from LIBOR to an alternative benchmark rate.

The implications of the March 5th Announcements could differ depending on the context under any given credit agreement and the extent to which the parties to such credit agreement departed from the ARRC proposed language.

For more information or advice with respect to the transition from LIBOR to SOFR, contact Jonathan Meyer.