United States: The End Of LIBOR

On March 5, 2021, the ICE Benchmark Administration (IBA), UK Financial Conduct Authority (FCA) and International Swaps and Derivatives Association (ISDA) made important announcements regarding the timelines of the cessations of the London Interbank Offered Rate (LIBOR).

LIBOR cessation dates

The IBA, which administers LIBOR, confirmed in its feedback statement on its consultation regarding the cessation of its publication of LIBOR that the majority of LIBOR panel banks would not be willing to contribute to LIBOR in the future and announced that it will cease publishing the LIBOR rates described below, as these settings will no longer be representative of market conditions.

Following the statement by the IBA, the FCA confirmed that all LIBOR benchmark settings will either cease to be provided by any administrator or no longer be representative of market conditions. Specifically, the LIBOR settings included in the table below will cease to be provided by any administrator after the following dates:

'Synthetic' LIBOR

Under proposed amendments to the UK Benchmarks Regulation, the FCA would have the power to require the IBA to continue publishing LIBOR settings on a "synthetic" basis using a changed methodology. The FCA has indicated that synthetic LIBOR would be based on a forward-looking term rate version of the relevant risk-free rate plus a fixed spread adjustment calculated over the same period and in the same way as the spread adjustment implemented in the IBOR Fallbacks Supplement (Fallbacks Supplement) and the 2020 IBOR Fallbacks Protocol (Fallbacks Protocol). The FCA has advised the IBA that it has no intention of using its proposed new powers to require the IBA to continue publication of any LIBOR setting beyond the intended cessation dates. However, for the LIBOR settings included in the table below, the FCA has advised the IBA that it will consult on using its proposed new powers to require the IBA to continue publishing them on a synthetic basis.

The FCA noted that publication of LIBOR settings on a synthetic basis would be intended to assist legacy contract holders, and new use of synthetic LIBOR by UK-regulated firms in regulated financial instruments would be prohibited under the Benchmarks Regulation as amended by the Financial Services Bill. Consequently, the LIBOR settings published on a synthetic basis will no longer be representative, and representativeness will not be restored as of the cessation dates announced by the IBA. The intent would be to assist only holders of certain categories of legacy contracts that do not have appropriate alternatives and cannot practically be amended (known as "tough legacy" contracts). The FCA also confirmed in its statement that based on undertakings received from the panel banks, it does not expect any LIBOR settings to become unrepresentative before the applicable cessation dates.

Index Cessation Event announcement

Following the FCA's announcement, the ISDA stated that the announcement constitutes an "Index Cessation Event" under the Fallbacks Supplement and Fallbacks Protocol, which in turn triggers a "Spread Adjustment Fixing Date" under the Bloomberg IBOR Fallback Rate Adjustments Rule Book for all LIBOR settings on March 5, 2021. The ISDA stated that the fallback spread adjustment published by Bloomberg has been fixed as of the date of the FCA announcement for all euro, sterling, Swiss franc, U.S. dollar (USD) and yen LIBOR settings. Bloomberg also published a corresponding announcement containing the table of fixed spread adjustments based on March 5, 2021, as the Spread Adjustment Fixing Date for all LIBOR tenors across all currencies, including the following spread adjustments for the USD LIBOR settings:

Impact of the announcements on U.S. loans

The FCA announcement and the IBA feedback statement are critical because they serve as a "trigger event" for the contractual fallback provisions recommended by the Alternative Reference Rates Committee (ARRC) with respect to USD LIBOR and the fallback provisions in the ISDA documentation. On March 8, 2021, ARRC confirmed that the FCA announcement and the IBA feedback statement constitute a "Benchmark Transition Event" with respect to all USD LIBOR settings under the ARRC-recommended fallback language for issuances or originations of LIBOR floating rate notes, securitizations, syndicated business loans and bilateral business loans. The occurrence of a Benchmark Transition Event does not require immediate transition under the ARRC-recommended fallback language, which is triggered on the "Benchmark Replacement Date" instead. The Benchmark Replacement Date is expected to occur on or immediately after the cessation date for the relevant USD LIBOR setting, pursuant to the announcements.

The effect of the FCA announcement and the IBA feedback statement depends on whether the underlying loan documentation has adopted the "hardwired" approach or the "amendment" approach. Under the amendment approach, ARRC's recommended language requires parties to amend the loan in order to effectuate the replacement of LIBOR with the Secured Overnight Financing Rate (SOFR) following the occurrence of a trigger event. Consequently, in the case of the amendment approach, the FCA announcement and the IBA feedback statement will only trigger a requirement that agents notify borrowers of the occurrence of a trigger event, but no change would actually occur until the parties agree to amend the loan agreement. Under the hardwired approach, the transition to SOFR will automatically occur upon the permanent cessation of publication or non-representativeness of the relevant LIBOR settings, which will occur on Dec. 31, 2021, or June 30, 2023 (depending on the setting). It should be noted that, under either approach, the loan documentation may include "early opt in" trigger language that would permit the agent and the borrower to elect an earlier transition. In any case, the credit spread adjustment for each relevant LIBOR setting will be the credit spread adjustment as calculated on March 5, 2021, and published on Bloomberg.

The IBA's statement is available here.

The FCA's announcement is available here.

The ISDA's statement on the FCA's announcement is available here.

The IBOR Fallbacks Supplement and ISDA 2020 IBOR Fallbacks Protocol are available here.

Bloomberg's announcement is available here.

The ARRC's press releases are available here and here.

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.