LIBOR Cessation: Impact on Legal Documentation

In March 2021 the U.K.’s Financial Conduct Authority (the “FCA”) announced the dates on which LIBOR would cease to be available. The cessation of LIBOR has been a long time coming (since the financial crisis, financial regulators have been looking at ways to move away from interbank offered rates to so-called risk-free rates (“RFRs”)¹ ) and much work has been done by financial regulators and industry bodies to prepare for it.

The ending of LIBOR is the first but by no means the last change to occur with respect to benchmark rates typically used for financial instruments - RFRs are preferred by regulators to traditional interbank offered rates as they are considered to be more transparent. Financial markets are witnessing the dawn of a new approach to benchmark rates.

This article looks at the legal impact of LIBOR cessation on companies and makes suggestions as to how they can best organise themselves for the world after LIBOR.

_{1. Such as SONIA, the Sterling Overnight Index Average, which is the Bank of England’s Sterling RFR Working Group’s preferred RFR for GBP.}

Important Dates

5 March 2021	FCA announces the cessation of 35 LIBOR benchmark settings.
31 December 2021	Last day of publication of GBP LIBOR settings, EUR LIBOR settings, CHF LIBOR settings, JPY LIBOR settings, 1-week and 2-month USD LIBOR settings.
30 June 2023	Last day of publication of Overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR settings.

Documentary impacts

LIBOR cessation and the move to RFRs has various implications for legal documentation to which companies may be a party. The most likely arrangements to be impacted are:

• credit facilities
• debt capital markets
  
• derivatives
  
• other banking or funding arrangements

Credit facilities

Many credit facilities are based upon forms developed by the Loan Market Association (the “LMA”). In anticipation of the phasing out of LIBOR, the LMA has developed language in its range of facility agreements to deal with such an eventuality. The LMA’s wording envisages that any necessary changes to the facility agreement resulting from a replacement of a benchmark rate, such as LIBOR, will need to be agreed by the principal obligor and the agent (acting on the instructions of the majority lenders). Older facility agreements, which pre-date the financial crisis, may not contain such language and changes relating to the discontinuation of LIBOR may require the approval of all the lenders in a syndicate. To assist market participants in making the necessary changes to their facility agreements, the LMA has produced exposure drafts of facility agreements using RFRs as the basis of interest calculation. In addition, an exposure draft of a rate selection agreement was produced by the LMA that allows parties to implement RFR related changes to facility agreements in a short-form manner.

Debt capital markets

Bond issuances, medium term note programmes and other debt capital market programmes which reference LIBOR will also be impacted by the ending of LIBOR. There is less uniformity when it comes to documentation in the debt capital markets than there is in the loan market. This means that issuers under debt capital markets programmes will need to check their programme documentation to determine how (if at all) events such as LIBOR cessation are dealt with. In the absence of clear fallback provisions with respect to rate replacement events or where programme documentation provides that the issuer can make the ultimate determination of a replacement rate, it may be necessary or desirable to seek bondholder/noteholder consent in respect of changes resulting from the cessation of LIBOR.

Derivatives

The derivatives market has taken the lead with respect to rate replacement issues. The International Swaps and Derivatives Association (“ISDA”) has been working with market participants for many years to develop solutions to allow almost seamless progression from one rate to another upon the occurrence of a rate cessation. Regarding the discontinuance of LIBOR, ISDA has implemented Supplement number 70 to the 2006 ISDA Definitions, which was finalised on 23 October 2020 and effective as of 25 January 2021 (the “IBOR Fallbacks Supplement”) which supplements the 2006 ISDA Definitions with fallback rates for LIBOR. In order to take care of transactions documented by reference to ISDA documents entered into prior to the effective date of the IBOR Fallbacks Supplement (“Legacy ISDA Documents”), ISDA has also implemented the ISDA 2020 IBOR Fallbacks Protocol (the “IBOR Fallbacks Protocol”), which market participants can unilaterally sign-up to. Adherence to the IBOR Fallbacks Protocol has the effect of incorporating the IBOR Fallbacks Supplement into any Legacy ISDA Documents entered into by any two adhering parties – meaning that whole suites of documents can be amended simply by adhering to one particular document. ISDA has also produced a form of amendment agreement to allow parties to implement the IBOR Fallbacks Supplement should parties not wish to adhere to the IBOR Fallbacks Protocol.

Other banking or funding arrangements

Bilateral arrangements with banks, such as overdraft facilities or cash-pooling may reference LIBOR depending on the currency or currencies covered by such arrangements. It will be important for companies to determine how the banks that they deal with intend to address the issue on a bilateral basis. Additionally, in large corporate groups internal funding arrangements, such as intra-group loan facilities, may reference LIBOR in their interest provisions. As it is less likely that intra-group lending is based on LMA standard documentation, analysis will need to be made by companies to work out how the cessation of LIBOR should be addressed at an intra-group level.

Preparations for the end of LIBOR

While it may be the case that some companies have already been approached by their financiers in connection with the discontinuance of LIBOR and have started the process of amending financing documents, there are some steps that can be taken if such contacts have not yet been made:
 

• Loan transactions: review loan documentation to determine (a) whether LIBOR is referenced (b) whether rate replacement language is included (c) the scope of any necessary amendments and (d) the consent levels required with respect to any amendments.
  
  
• Debt capital markets transactions: review programme documentation (a) whether LIBOR is referenced (b) whether rate replacement language is included (c) the scope of any necessary amendments, consents or determinations that need to be made by the issuer. Following such review, the issuer may need to make approaches to bondholders/noteholders – depending on the number, this process may be time consuming.
  
  
• Derivative transactions: a review of derivative transactions will need to be made to determine whether LIBOR is referenced. If LIBOR is referenced, then companies should consider whether it is in their interests to adhere to the IBOR Fallbacks Protocol or otherwise approach counterparties with a view to making bilateral amendments to Legacy ISDA Documentation. In the case of derivatives transactions based on a bank’s own form documents, then further analysis will need to be made as to the scope of any amendments.
  
  
• Other banking or funding arrangements: an analysis of a company’s banking arrangements will be needed to determine whether those arrangements are impacted by the discontinuation of LIBOR. If changes are required, companies will need to address how such changes are to be implemented. Companies will also need to consider their internal funding and intra-group arrangements, whereas agreeing necessary changes is unlikely to be controversial but if there are numerous documents to be changed, the process may be time consuming.
  
  
• Security, guarantees and other collateral: if a company’s financial arrangements are supported by security, guarantees or other forms of collateral, checks will need to be made to ensure that those obligations are not adversely impacted by any LIBOR related amendments.
  

Final thoughts

The end of LIBOR is approaching, and companies need to ready themselves to ensure that their legal documentation reflects this important milestone. Timely preparation for LIBORs discontinuance now can help to avoid an end of year rush to get amendments done.