The Transition Away from LIBOR Gains Traction

The transition from U.S. dollar (USD) LIBOR to a more robust reference rate is a necessity. The UK’s Financial Conduct Authority (FCA) is responsible for regulating LIBOR, and FCA Chief Executive Andrew Bailey has made clear that the publication of LIBOR is not guaranteed beyond 2021, so time is of the essence.

On July 16, 2020, the Loan Syndications and Trading Association (LSTA) posted a summary of an analysis prepared by Covenant review of 288 commercial loans made during the first quarter of 2020.  This analysis shows that seven percent of the loan documentations did not include any LIBOR fallback language.

While it is positive that 93% of the loans made in the first quarter address the need for a LIBOR fallback, this analysis shows that some market participants continue to ignore the impending transition. The Alternative Reference Rates Committee (ARRC) has indicated that starting September 30, 2020, it is best practice to include a hardwired fallback (more on that in future posts). The Federal Financial Institutions Examination Council states that the supervisory focus on evaluating banking institutions’ preparedness for LIBOR’s discontinuation will increase during 2020 and 2021, particularly for institutions with significant LIBOR exposure or less-developed transition processes. Loan volume will undoubtedly be lower in the second quarter of 2020 due to COVID-19 disruption, but it will be interesting to see if addition of LIBOR fallback language reaches the 100% threshold.