International: Welcome to the world of risk-free rates

In brief

Welcome to the November edition of In the Know, Baker McKenzie's Leveraged Finance newsletter that analyzes significant trends and salient legal issues for participants in leveraged finance and high-yield markets around the globe.

When we last wrote on the topic of LIBOR transition for In the Know at the end of 2021, the path ahead was uncertain and speculation lingered around whether LIBORs would ever actually be withdrawn. Thankfully, much has fallen into place in the intervening period and the move away from LIBORs toward alternative near-risk-free rates (RFRs) is in full swing. In this article we assess the progress to date and the challenges that remain.
 


Contents

Key takeaways

  • LIBOR transition has progressed well for sterling, Swiss franc and Japanese yen financial contracts, with wide acceptance, and adoption, of RFRs in all market sectors in new contracts and dwindling volumes of legacy contracts still awaiting remediation.
  • Whilst progress for US dollar financial contracts has been slower. Work has accelerated during 2022. However, US dollar LIBOR transition poses unique challenges due to its widespread use globally.
  • Clear and consistent market consensus has developed around the application of RFRs in sterling, Swiss franc and Japanese yen financial contracts with a compounded in arrears rate structure favored for the majority of loans.
  • US dollar loan markets in the US, in contrast, are consistently favoring a forward-looking term rate based on SOFR, the US RFR (Term SOFR). This consensus is impacting the US dollar markets outside the US with increasing use of Term SOFR in US dollar transactions with non-US entities.
  • Whilst there are no current plans for EURIBOR to cease publication, interbank-offered rates for other currencies either may, or in some cases will, cease in the future. This will pose a continuing challenge for market participants to monitor and adapt to changes.

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