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LIBOR Transition Within the Context of COVID-19

Amid the Coronavirus Disease 2019 (COVID-19) pandemic, “steady as she goes” seems the current position of the different regulators in charge of coordinating an orderly transition from LIBOR to alternative reference rates, in particular, after the UK’s Financial Conduct Authority (FCA) confirmed on April 29, 2020, that “firms cannot rely on LIBOR being published after the end of 2021”.

Notwithstanding that the FCA has extended the deadline for ending the use of the LIBOR interest rate benchmark in new loans until the end of March 2021 (from September 2020), giving more time to banks already dealing with COVID-19-related issues, the FCA has stayed course and not extended the use of LIBOR past the original deadline of end of 2021.

Meanwhile, authorities around the world are preparing for the discontinuation of LIBOR as originally announced. For example, regulators in Australia and South Korea have encouraged market participants to assess their exposure to LIBOR and begin their transition to alternative rates. In the United States, the Alternative Reference Rates Committee (ARRC) (convened by the Federal Reserve Board and the New York Fed) continues to chart the course by providing its own list of objectives for 2020 and a list with recommended best practices for the cessation of U.S. dollar LIBOR, “doubling down” on its early decision to use the Secured Overnight Financing Rate (SOFR) as the alternative rate for the U.S. market after LIBOR is no longer quoted. In addition, questions persist in the United States about the viability of SOFR given recent volatility and the lack of a forward-looking term SOFR rate.

It is possible that the FCA will not further extend the use of LIBOR, and that the ARRC will not select a different rate as the recommended alternative reference rate. However, the FCA and/or ARRC may change their minds. For example, if SOFR spreads widen considerably from LIBOR during this economic crisis, as they did in a backtrack calculation during the 2008 Financial Crisis, pressure may grow from market participants to find an alternative rate. Further, some of the COVID-19 stimulus loan programs in the United States, intended to provide relief and liquidity during the crisis, are currently indexed in LIBOR (and not SOFR), because “quickly implementing new systems to issue loans based on SOFR would require diverting resources from challenges related to the pandemic.” (see question G.3 in the Federal Reserve’s FAQs in connection with The Main Street Lending Program).

The crisis created by COVID-19 has made market participants change priorities to address more urgent matters, and has placed transition efforts on the back-burner. As such, banks and other market participants may not be working to determine their exposure to existing contracts referencing LIBOR, outlining plans of action, changing internal models, modifying their operational systems, and further, engaging counterparties in renegotiating – when necessary – documentation that may not properly provide for a useful alternative reference rate.

COVID-19 disrupted the world as we know it. With economies around the world having to adapt to a new reality, financial institutions may wish to prioritize plans related to an orderly transition to alternative reference rates. Indeed, pre-cessation triggers may hit before 2021 if LIBOR becomes unrepresentative of London interbank offered rates. In such a case, the LIBOR disruption may occur well before it was planned by any market participant.

Read GT’s LIBOR Transition Newsletter, where we provide updates, analysis, and occasional commentary on the latest developments relating to the highly anticipated phasing-out of LIBOR at the end of 2021 – just 19 months from now.

©2020 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume X, Number 153

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Oscar Stephens Finance & Banking Attorney Greenberg Traurig Law Firm
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Oscar Stephens represents issuers, borrowers, underwriters, arrangers, placement agents, investors and lenders in a wide variety of multi-currency financing transactions.

Oscar’s practice focuses on advising private corporations, financial institutions, sovereign and quasi-sovereign entities on bilateral and syndicated lending, private placements and capital markets deals with a cross-border component, particularly in Latin America. He has deep experience in structures involving debtors and assets located in, and revenues originated out of,...

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Graeme McLellan Assett Financial Attorney Greenberg Traurig Law Firm
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Graeme McLellan is an asset finance professional with particular focus on the aircraft and rail rolling stock sectors, regularly advising major sophisticated international clients on business-critical matters.

His experience includes secured loans, bond financings, tax leasings, Islamic financings, and portfolio acquisitions / disposals. He enjoys cutting through complex and difficult issues, applying experience of structured, cross-border transactions to develop innovative strategies.

Graeme frequently advises new market entrants on their initial market studies, product development and structuring, bids for opportunities, and implementation of winning bids.

In the rail sector, Graeme advises on transactions internationally and has been involved in the UK rail sector since privatisation. He has advised on many major rolling stock transactions, often applying his broader knowledge to the development of innovative strategies.

Graeme is a renowned for his aircraft finance experience in the commercial aircraft and corporate / private jet sectors. He advises on a broad range of transaction structures, including lessor financings and Islamic financings.

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Koichiro Ohashi Financial lawyer Greenberg Traurig
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Koichiro Ohashi is Co-Chair of the Japan Practice and focuses his practice on representing clients in a variety of financial matters, including cross-border and domestic banking, capital market transactions e.g. establishment of sponsored American Deposit Receipt programs, fund and investment management matters (private equities, hedge funds and REITs), and corporate matters (especially in mergers and acquisitions, and restructuring transactions). He is experienced in the Japanese domestic market and represents both Japanese and international financial institutions on numerous types of...

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Wietse de Jong focuses his practice on the structuring of financial products and capital market transactions, including setting up banks, investment funds, structured products, and the issue of listed and over-the-counter debt and equity securities. Wietse has worked on other financial industry transactions, including initial public offerings (IPO) and pre-offering equity financing, venture capital, joint ventures, and the sale and purchase of banks, asset managers and other regulated financial institutions such as pension funds and insurance companies. Wietse has...

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Arleen Nand represents banks, cooperatives, investment banks, as well as hedge funds, private equity firms, and corporations in cross-border and domestic financings. In recent years, Arleen has structured, drafted, and negotiated more than $25 billion of leveraged finance transactions.

Arleen has served as lead counsel on numerous financings, including cross-border credit facilities, securitizations, syndicated loan transactions, credit-linked notes, asset-based and cash flow financings, convertible debt facilities, private placements, joint venture financings, debtor-in-possession...

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Ms. Durham has experience on both the legal and business sides of derivatives, private funds, complex financing transactions, and structured products. Prior to joining Greenberg, she was an investment banker and Head of Structured Equity Products at BNP Paribas where she concentrated on structuring equity financing and equity derivative transactions for corporations and hedge funds. Prior to BNP, she was a partner in the Corporate Dept. at the law firm of Weil, Gotshal & Manges LLP.

Ms. Durham has been involved as both a lawyer and...

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Emma L. Menzies focuses her practice on all types of finance, including general syndicated lending, leveraged finance, project finance and restructurings and workouts. Emma has acted for a wide range of financial institutions, creditor groups, borrowers and other stakeholders.

According to the Chambers UK Guide 2017, Emma is heralded as possessing an “eye for detail and a memory to match” in addition to being “very responsive, extremely practical and business-minded.” She undertakes a broad range of work, including leveraged finance,...

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