Interesting times ahead – the end of LIBOR is fixed
In recent months, there has been an increase in instructions relating to the London Interbank Offered Rate(LIBOR) facility amendments, driven by the planned discontinuation of LIBOR on 31 December 2021.
LIBOR is, in simple terms, the average interest rate at which banks lend to each other for unsecured short-term lending in the London interbank market. It is used by financial institutions as a benchmark for setting interest rates on other loans and debt instruments, and as a benchmark rate for a host of other financial products including mortgages, corporate loans, and credit cards. For many years it has been the most referenced short-term interest rate in the world and underpins most financial products. With an estimated US$370 trillion in financial contracts linked to LIBOR, its discontinuation will have a significant impact on businesses, capital markets, commercial lending, and wealth management.
As the deadline for the discontinuation of LIBOR draws nearer, lenders and law firms are in the process of reviewing loan documentation to determine whether LIBOR is referenced, which rate replacement language and calculations will be suitable, and the appropriate consent levels required with respect to the amendments. Financial institutions have been grappling with whether to amend existing facility agreements to incorporate alternative forms of interest rates (the most popular being Risk Free Reference Rates and Sterling Overnight Index Average) or leave the facility agreements as is and rely on existing fallback provisions. They may separately need to consider whether any security underpinning the facility also needs to be amended or reconfirmed.
From a BVI and Cayman perspective, there has been a spate of amendments to legacy facility agreements, attendant underlying security reviews to determine whether security will need to be confirmed or retaken given the transition from one interest rate to another, as well as other legal considerations around the need for updated due diligence, formal legal opinions, and corporate approvals. Whilst the process appears to be largely lender-driven, companies should not rely on lenders to lead the charge and should be encouraged to take steps to prepare themselves for the end of LIBOR by conducting reviews of existing contracts and systems to assess their exposure to LIBOR and putting suitable systems put in place to weather the transition. Corporate groups with intercompany lending arrangements which are tied to LIBOR should also consider whether amendments are needed. This may be a particular risk when downstream lending on a "matched funding" basis where differences in interest rates could cause solvency or liquidity issues (in the worst case).
We expect this work to continue right up until the deadline, and look forward to raising a glass to the end of LIBOR on New Year’s Eve.