The Phase-out of LIBOR and Implementation of Alternative Reference Rates

August 4, 2017

By: Mark Heimendinger

We wanted to bring to your attention that Andrew Bailey of the U.K.'s Financial Conduct Authority (FCA) announced last Thursday that he wants LIBOR phased out by the end of 2021 (when the FCA will stop requiring LIBOR rate quotes by the reference banks). This position more closely aligns the FCA with the Alternative Reference Rates Committee (ARRC) here in the U.S., which announced a preference for a broad Treasury repo financing rate back on June 22nd, and possibly accelerated the demise of LIBOR (which has been slowly developing out of the LIBOR rate fixing scandal and the decline in the volume of interbank lending). While it's still too early to amend current transaction documents and the demise of LIBOR is neither immediately imminent nor certain given the fact that the broad Treasury repo financing rate isn’t expected to be available for daily quotes until at least early 2018, and it is currently only an overnight rate, we do believe that it is important to keep on top of future pronouncements and get a handle on what your documentation covers in terms of alternative reference rates. It is also important to note that the FCA’s Sterling Overnight Index Average (SONIA) and other potential indexes are being discussed in addition to the broad Treasury repo financing rate, so the market may be eventually become more fragmented by country and currency.

In respect of documentation, while the Loan Syndications and Trading Association (LSTA) is obviously following these developments so money center bank documentation will follow, we are still regularly running into out-of-date references to BBA LIBOR in middle market loan documentation, so it's important to keep in mind that all documentation is not created equal. In other words, while LIBOR replacement reference rate “boilerplate” language is not critical at this point, it is becoming increasingly relevant and should not be glossed over, particularly on any financing that matures during or after 2021. Finally, while both the FCA and ARRC are working to avoid market disruption, please understand that if and when LIBOR is replaced it may not be as simple as replacing the reference page or organization (as with the replacement of BBA-LIBOR with ICE-LIBOR) which is contemplated in most standard documentation. In addition, any new reference rate would not necessarily track LIBOR. As a result, changes in spreads and/or refinancings may need to be considered and negotiated during and following 2021. We are tracking this carefully, and we are always happy to discuss if you have any questions.

 

The ARRC announcement from June 22nd is located here:  https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf

The following contains LSTA announcements (with links through for context): http://www.lsta.org/news-and-resources/news/libor-redux

 Overview of the Revised Broad Treasures Financing Rate from Liberty Street Economics may be found here: http://libertystreeteconomics.newyorkfed.org/2017/06/introducing-the-revised-broad-treasuries-financing-rate.html