Europe: LIBOR - Redefining the transition timeline

In brief

Progress on the reform of LIBOR has not stopped during the COVID-19 pandemic.

While the overall timing for LIBOR transition has remained unchanged, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) has recognized the need to introduce some flexibility in relation to the interim transition deadlines to ensure that lenders are able to continue to supply credit to the real economy and assist with economic recovery.

Although market participants will undoubtedly welcome this added flexibility, a smooth and timely transition will still require lenders to be proactive in reviewing and implementing their LIBOR transition plans.


Contents

On 29 April 2020, the RFRWG issued a statement on the impact of Coronavirus on the timeline for firms' LIBOR transition plans ("Statement").1 Although the key message conveyed by the Statement (itself referring to a joint statement of the FCA, the Bank of England and the RFRWG dated 25 March 20202) is that the overall timing for discontinuation of LIBOR will be maintained, interim deadlines have been adjusted to respond to the challenges posed by the COVID-19 pandemic.

While the bond market has already witnessed considerable progress in transitioning to SONIA, the pace of transition in the loan market has been considerably slower, and the RFRWG, the FCA and the Bank of England have recognized that, under the current circumstances, it may not be feasible to complete the transition away from LIBOR on all new sterling LIBOR-linked loans within the original time frame (i.e., by Q3 2020). The adjustment of the interim timelines will prompt lenders to rethink their transition plans and redefine their strategy.

What are lenders required to do and by when?

The table below sets out the new timeline and the actions required from lenders:

Date What needs to happen Actions that lenders need to take
By Q3 2020 New non-LIBOR linked products to be made available to customers Establish, approve and implement the use of new non-LIBOR linked products
By Q4 2020 Clear contractual arrangements to be included in all new and re-financed LIBOR-referencing loan products to facilitate conversion (pre-agreed conversion terms or an agreed process for renegotiation to SONIA or other alternatives) Introduce conversion or fallback mechanisms in new LIBOR-referencing loan contracts (whether "new money" deals or refinancings)
By Q1 2021 No further issuance of sterling LIBORreferencing loan products expiring after Q4 2021

LIBOR-linked products to be discontinued

New non-LIBOR linked products to be used for any facilities expiring after Q4 2021 (or which can possibly be extended or renewed in the same terms)

By Q4 2021 Discontinuation of LIBOR Implement changes to all legacy deals to ensure that LIBOR will no longer be used

 

Although most market participants will certainly welcome an alleviation of the interim transition deadlines, the six-month delay in the discontinuation of new LIBOR products may result in a number of LIBOR-linked contracts continuing to be originated up to Q1 2021. Whilst we have seen most lenders including conversion or fallback mechanisms in their new LIBOR-linked contracts for some time now, any contracts in which such fallback mechanisms are not contemplated will require remediation within a very short time frame.

Furthermore, the practical difficulties caused by the limited period available to re-paper legacy deals (which will often need to be amended on a contract by contract basis and/or require involved negotiations between parties) will not be addressed and will even be exacerbated by the uncertainty relating to the approach to legacy contracts (including in relation to the calculation of the credit spread adjustment in cash products) and by lenders' inability to cope with multiple competing priorities during this exceptionally demanding period.

What are the next steps for lenders?

To address the issues identified above, lenders should:

  • carefully consider whether new LIBOR-linked origination is actually required or if alternative products that are nonLIBOR-linked may be offered to customers;
  • introduce robust conversion and/or fallback mechanisms in new loan or refinancing documentation (to the extent that this has not yet been implemented as standard practice);
  • identify all legacy LIBOR-linked contracts and proactively initiate discussions with borrowers to enable transition to alternative rates;
  • continue to monitor the progress of the work of the RFRWG, that will continue to deliver the transition plan and address pending issues, including approach to 'tough legacy' contracts and calculation methodology for a fair credit spread adjustment in legacy cash products; and
  • engage with the PRA and FCA, who recently announced their decision to end the suspension of transition data reporting and of certain supervisory activities due to COVID-19 and resume supervisory engagement with firms on their LIBOR transition progress from 1 June 2020.

1 https://www.fca.org.uk/news/statements/further-statement-rfrwg-impact-coronavirus-timeline-firms-libor-transition-plans

2 https://www.fca.org.uk/news/statements/impact-coronavirus-firms-libor-transition-plans

Contact Information

Copyright © 2023 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.