LIBOR Transition: Feedback from FCA Consultation on Synthetic LIBOR

Further to our recent blog post on synthetic LIBOR, the Financial Conduct Authority (the “FCA”) has published its feedback statement on its consultation regarding the legacy use of 1, 3 and 6 month sterling LIBOR from 1 January 2022. The feedback consisted of 36 responses from market participants, with the majority of respondents agreeing with all aspects of the FCA’s proposals. The FCA has confirmed that it will permit legacy use of synthetic Sterling LIBOR by supervised entities, aside from cleared derivatives.

The FCA confirmed that one, three and six-month synthetic Sterling LIBOR will be calculated as the sum of the applicable one, three or six-month Term SONIA Reference Rates provided by IBA and the fixed spread adjustment applicable as part of the ISDA IBOR fallback for one, three or six-month Sterling LIBOR, which is published for the purposes of the ISDA IBOR Fallbacks Supplement and Protocol. IBA will be required to continue publishing synthetic Sterling LIBOR for all applicable London business days, except London public holidays.

It is of note that some market participants queried the use of forward-looking term RFR as a component for synthetic LIBOR, suggesting the use of RFRs “in-arrears” instead in order to align with ISDA fallbacks. The FCA’s response to this suggestion was that RFRs “in-arrears” are not suitable for contracts which require the interest rate to be identified up-front, and as such contracts are not realistically able to be amended to work using RFRs “in-arrears”, the use of such rates in the calculation of synthetic LIBOR could have the potential to cause market disruption.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo and Natalie A. Stewart.

LIBOR Transition: Synthetic Sterling LIBOR for limited tough legacy loans

As the cessation of LIBOR panels draws closer, the Financial Conduct Authority (the “FCA”) has been looking at ways to mitigate market disruption in respect of tough legacy loans which link to LIBOR but expire after LIBOR is discontinued. As a result, the FCA will require ICE Benchmark Administration to publish a synthetic Sterling LIBOR for the duration of 2022.

Despite at first instance appearing to be a solution for products which have yet to be amended for the cessation of LIBOR, synthetic LIBOR is only intended to be used for certain tough legacy contracts. To learn more about how synthetic LIBOR will work in practice and the legacy contracts which are likely to be able to utilize synthetic LIBOR, check out our Alert here.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, Phuong (Michelle) Ngo and Natalie A. Stewart.

 

LIBOR Transition: Release the CRITR?

It doesn’t sound quite as scary as the mythical monster from Scandinavian folklore, but it’s not intended to be. CRITR is not a complete game changer in LIBOR transition or trying to be one. What is it then?

The Credit Inclusive Term Rate (CRITR) and the spread only Credit Inclusive Term Spread (CRITS) are the latest products of IHS Markit, a $44 billion company that is set to merge with S&P Global later this year. IHS Markit initially developed CRITS to provide the market with an alternative credit sensitive spread over SOFR. When Term SOFR failed to materialize, it developed CRITR as a standalone credit sensitive rate with forward looking tenors similar to LIBOR.

In a crowded field with Ameribor and BSBY in addition to SOFR, and Term SOFR likely coming by the end of July, and regulators expressing concern about rates other than SOFR, and borrowers not too keen on credit sensitive rates, is there room for a new rate option?  Interest rates are a diverse, multi trillion dollar market, and even a small sliver of it can be lucrative if the rates take hold. Is it right for you? We discuss CRITR and CRITS in more detail in our recent Alert.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: News Flash- Borrowers Don’t Like Volatile, Credit Sensitive Rates

So far, much of the emphasis on LIBOR transition has been on lenders. As we all wait for alternative rates to hit the market, the Association for Financial Professionals, the National Association of Corporate Treasurers and the U.S. Chamber of Commerce joined in a letter to voice the concerns that borrowers have about the pace of the roll out to the Department of the Treasury, the Federal Reserve, the SEC and the CFTC.

This message isn’t surprising, but the letter contained another component that is worth highlighting. When asked if they prefer SOFR or “potential credit sensitive rates that could move up like LIBOR has done in times of economic stress”, roughly 85% of borrowers surveyed chose SOFR. Put that way, it’s surprising that even 15% of borrowers preferred credit sensitive rates.

Is this the death knell for credit sensitive rates like Ameribor and BSBY before they even get off the ground? Should borrowers really pick only SOFR? The answers are not as simple as they may seem. In our recent Alert, we discuss some of the considerations that borrowers, and lenders that are planning in earnest to offer credit sensitive alternative rates, should keep in mind.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

To Hardwire or Not to Hardwire?

The question is not nearly as existential as the question phrased by William Shakespeare, but it is a significant one in the lending world as the transition from LIBOR to SOFR ideally happens by the middle of next year.  The official answer is easy—hardwired LIBOR transition language is recommended by the ARRC for syndicated loans and bilateral loans.  For diligent lenders, adopting hardwired language is part of a proactive approach to addressing the LIBOR transition process.  By setting the broad parameters of the new rate up front now, the ultimate details of implementing the new rate can be simplified with a notice to the borrower rather than negotiating an amendment in the future when time is short. Our prior Alert discusses the hardwired approach in more detail.

Still, for some lenders there are solid reasons to adopt a wait and see approach and possibly skip the hardwired language.  These lenders are no less diligent in their desire to do the right thing, but the developments in the LIBOR/SOFR transition are starting to accelerate, with major details still unsettled at this point.  Determining how the broad market will handle the transition and keeping a lender’s actions in line with the market without getting ahead of the developments may suggest a more cautious approach.

Continue reading “To Hardwire or Not to Hardwire?”

Hardwired for a Smoother LIBOR Transition?

The London Interbank Offered Rate (LIBOR), which has served as a reference rate for approximately $350 trillion of debt and derivatives, will be phased out after December 31, 2021. In the United States, the Alternative Reference Rates Committee (ARRC), convened by the Federal Reserve Board and the New York Fed, has been tasked with ensuring a successful transition from USD LIBOR to a more robust reference rate. In June 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) as its recommended alternative to USD LIBOR. In April 2019, the ARRC first published recommended fallback language for syndicated business loans. At the time, the recommendations provided two approaches: an “amendment approach”―which delays all decisions about the successor rate and adjustment until a future date―and a “hardwired approach”―which hardwires the priority of replacement rates to be selected into the credit agreement upon origination based on what replacement rates are available at the time of replacement and provides for an easier amendment of related terms.

The syndicated lending market has largely adopted the amendment approach so far. In June 2020, however, the ARRC released refreshed recommendations regarding fallback language for U.S. dollar-denominated syndicated business loans that reference LIBOR. Unlike the April 2019 recommendations, the June 2020 recommendations provide only for hardwired fallback provisions. Read on to see how our Alert, published today, can help you discern the differences between the hardwired approach and the amendment approach and determine which works best for you.

Continue reading “Hardwired for a Smoother LIBOR Transition?”

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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