How are market participants dealing with the retirement of Libor?

Earlier this year I wrote about the Financial Conduct Authority’s (FCA) announcement in July of its plan to phase-out the London Interbank Offered Rate (Libor), the interest rate benchmark used to set payments on more than $350 trillion in financial contracts such interest-rate derivatives, corporate bonds, mortgage loans and more. The FCA’s intention is to retire Libor by the end of 2021, or perhaps more accurately, the FCA will cease to regulate Libor after 2021.

Several reasons, including a sharp decline in observable transaction reporting and the resultant susceptibility to manipulation have been cited as the some of the reasons driving the change. Many readers will be familiar with reports of the issues relating to Libor, some good accounts of which can be found here and here.

While the response from commentators to the announcement has been overwhelmingly in favour of a change, market participants must now face reality and consider how they will work with the impending shift away from Libor in the intervening period between now and 2021. It is fair to say that there has been a gradual response thus far. Lawyers and others who work on transactional banking and finance matters on a daily basis continue to see Libor used in credit arrangements, for both new facilities and amendments. Some of us have started to see guidance from banks with respect to Libor alternative language which can be included in credit agreements for new transactions. The alternative rate language continues to reference Libor screen rates although the waterfall of alternate rate provisions, which kick in when certain rates are unavailable, are clearly being firmed up with Libor retirement in mind.

It is expected that daily Libor rates will continue to be published for several years even after the FCA steps aside, so while Libor may not be used as frequently in transactions it will likely still be alive and well in certain respects and in theory, credit arrangements could reference Libor for the foreseeable future so long as it continues to be published.

At the end of the day, because of the alternate rate of interest provisions that are built into credit agreements, it is unlikely that there will ever be a lack of reference interest rate. However, borrowers and credit parties should be aware of these provisions and how such rates are determined as it could have a significant impact on their servicing obligations.

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