UK: The End Of LIBOR – And What Aircraft Financiers And Lessors Can Do About It

Last Updated: 23 January 2019
Article by Alexander Hewitt

LIBOR is likely to come to an end after 2021. In the global financial and leasing markets, loans, leases, bonds, hedging, sale and purchase and other agreements worth trillions of dollars annually use LIBOR in their interest rate calculations. Despite this, 18 months after the likely end of LIBOR became apparent in 2017 there is no replacement interest rate that can be plugged into aircraft leasing or finance documents as a direct LIBOR substitute. Accordingly, we examine below:

  • what has led to "LIBOR discontinuance";
  • the search for LIBOR replacements;
  • what aircraft financiers and lessors can do to prepare for the end of LIBOR.

Why is LIBOR ending?

Despite many market participants strongly preferring to keep LIBOR, its likely discontinuance after 2021 is a product of:

  • global financial regulatory reforms requiring benchmark interest rates to be calculated with greater rigour and transparency and using real underlying transactions (rather than expert judgment);
  • the post-2008 financial crisis drying up of much of the wholesale term lending among banks in the London market for many of the tenors and currencies in which LIBOR has been calculated; and
  • the UK's Financial Conduct Authority announcing in July 2017 that it will no longer seek to compel or persuade increasingly reluctant LIBOR panel banks to continue making their submissions beyond the end of 2021. Without that persuasion or compulsion, it is likely that many panel LIBOR banks will be unwilling to continue with that role.

What will replace LIBOR?

LIBOR is to be replaced by a number of "risk free rates" (RFRs). Each currency for which LIBOR is currently quoted will have its own RFR. Each RFR will be:

  • based on the rates charged in overnight lending in that currency in the previous 24 hours among banks and other financial institutions in the principal financial centre for that currency; and
  • regulated by the central banking or other financial regulatory authorities in the country of that currency.

Three of the key RFRs are:

  • US Dollars – SOFR (the Secured Overnight Financing Rate), which is a (secured) repo rate administered by the Federal Reserve Bank of New York;
  • Euro – ESTER, an unsecured rate that the European Central Bank will administer; and
  • Sterling – SONIA (the Sterling Overnight Index Average), an unsecured rate administered by the Bank of England.

Apart from ESTER, which is to be published from October 2019, the RFRs mentioned above are already being published. By themselves, however, these RFRs are not a direct replacement for LIBOR. This is because LIBOR:

  • is a forward-looking term interest rate;
  • measures bank credit and term risk over (for example) a one, three or six month period.

RFRs, however, are backward-looking rates (looking back over the previous 24 hours) that do not measure bank credit or term risk to any material degree. Instead, they are designed to be as near risk free rates as you can get when using interest rate quotations from real world interbank lending.

It may, in theory, be possible in future for new aircraft leases, loans and related agreements to use a raw RFR as an interest rate benchmark. However, raw RFRs cannot simply be slotted into existing leases or loans to replace LIBOR because, as noted above, raw RFRs do not price in the same risks as LIBOR. If an existing aircraft lease (or related loan) did replace LIBOR with a raw RFR, the lease or loan would need to be significantly amended to bridge the gap between the RFR being slotted in and the LIBOR rate it replaces. Alternatively, the RFR being slotted in would have to measure term and bank credit risk, or their equivalent, to a greater degree than the raw RFRs developed to date. This latter approach is being taken in the search to replace LIBOR by looking for methods to:

  • produce term RFRs that can, for example, fix interest rates for the most common LIBOR tenors; and
  • find a way to bridge the pricing gap between LIBOR and the raw and term RFRs that are to replace it.

Term RFRs

Producing term RFRs is proving harder than the initial task of coming up with the raw overnight RFRs. Among other difficulties, there is a debate over whether term RFRs should be forward or backwardlooking. Most market participants strongly favour forward-looking term RFRs. Some regulators prefer backward-looking term RFRs.

Forward-looking term RFRs

A forward-looking term RFR would work in the same way as, for example, interest rate fixing under a syndicated loan. The rate is fixed at the beginning of each interest period. That rate then applies in advance to that interest period so that the parties know at the start of the interest period how much interest is due at its end.

Backward-looking term RFRs

With a backward-looking term RFR, the interest rate is fixed at the end of the interest period, or other period to which it applies. So again, with a syndicated loan, a backward-looking term RFR would involve interest being calculated at or near the end of each interest period. There are many practical disadvantages, and greatly increased administration costs, to fixing the interest rate in this way, which have made this proposal very unpopular with market participants.

Bridging the pricing gap between LIBOR and the new RFRs

To bridge this gap, the search is on for a way to price term and bank credit risk, or their equivalent, back into the new RFRs. There is no agreed methodology for doing this to date. One common theme is the use of credit spreads. If credit spreads are used, a separate spread for each currency and tenor could be added to each new raw RFR. In theory, the resulting rate should be equivalent, or closer, to the rate one would have had if LIBOR had continued. Other methodologies are being examined.

What should aircraft financiers and lessors do?

Aircraft financiers and lessors would be prudent to consider whether their current or future transaction documents which use LIBOR and which may run beyond 2021 contain robust language:

  • providing a fallback interest calculation method that would work for the remainder of the transaction; or
  • providing an efficient process for replacing any LIBOR-based interest rate calculation, or fallback interest rate calculation that can only work in the shortterm,

that would kick in if LIBOR were to end during the transaction.

An efficient process in a free-standing aircraft lease might involve, for example:

  • the lessor and the lessee agreeing to negotiate in good faith for a set period to find a replacement for LIBOR in their lease. Failing such agreement, the interest rate might be based on the lessor's cost of funds from whatever source it reasonably selected; or
  • adopting a fixed rate (and entering into related hedging agreements).

For any syndicated loan linked to an aircraft lease, an efficient process might involve replacing LIBOR by majority lender consent rather than all lender consent. However, the smaller the likely syndicate the less need there is to move away from all lender consent.

For English law syndicated loans, the Loan Market Association has produced a Screen Rate Replacement clause for this purpose, which has the option of agreeing amendments with majority lender consent, as well as with the consent of the borrower(s) or its (or their) parent. Where the syndicated loan is linked to a finance lease, for example, the lessee would want its consent to be required as well.

The Screen Rate Replacement clause can optionally be triggered in a wide range of situations in which it may be desirable to substitute a new rate for LIBOR. This is done by adopting the defined term "Screen Rate Replacement Event". The clause also contemplates a range of related amendments – such as replacing the fallbacks from LIBOR with fallbacks from the replacement rate for LIBOR.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions