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Are Your Loan Documents Ready For The Death Of LIBOR?

The London Interbank Offered Rate ("LIBOR") is a nearly 50-year old global borrowing benchmark which underpins more than $350 trillion of financial products. LIBOR is based on daily submissions from a panel of banks estimating the interest rate on which they estimate they would be able to borrow funds from one another in five different currencies across seven time periods.  Despite LIBOR's history and wide-spread use, the Financial Conduct Authority ("FCA") of the United Kingdom plans to phase out the key interest-rate indicator by the end of 2021 in the wake of a rate-fixing scandal that revealed that LIBOR was unreliable and unsustainable.

As a result of the phase out, the FCA will stop requiring banks to submit the daily rates used to calculate LIBOR at the end of 2021. Without these submissions, it is unclear whether the panel banks will continue to submit rates or whether LIBOR will stop being published.  Nonetheless, lenders must start to prepare for the transition away from LIBOR in both existing and new loans.  Existing loans tied to LIBOR should be reviewed to determine if the loan documents include language sufficient to provide for the application of an alternate rate in the event LIBOR is no longer published.  Alternatively, lenders must explore amendment of their loan documents to provide for the application of a new interest rate.  For new loans, if lenders want to continue to use LIBOR in the near term, the documents should provide alternatives for choosing an interest rate in the event that LIBOR is completely phased out.

Alternative rates to LIBOR are currently being explored in many countries. In the United States, the Federal Reserve created the Alternative Reference Rates Committee to find a replacement rate for LIBOR.  That committee has proposed a broad Treasuries repurchase finance rate based on the cost of borrowing against government debt of the United States.  It is anticipated that this rate will be published in the first half of 2018.  Abroad, the Bank of England has proposed a reformed version of the Sterling Overnight Index Average which is based on the cost of actual transactions in the overnight unsecured market.  This reformed rate will be available in April of 2018.  The advantage that the proposals from the Federal Reserve and Bank of England have over LIBOR is that they are based on actual transactions instead of estimates.  This reduces the likelihood of manipulation.  Regardless of the interest rate bench mark that ultimately replaces LIBOR, lenders should start planning for the death of LIBOR now to avoid potential issues in 2021.