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The Phasing Out of LIBOR: Initial Reaction and Preparation

1. Background: Elimination of LIBOR by 2021

As has been widely publicized, on July 27, 2017, the U.K. Financial Conduct Authority announced that LIBOR (London Interbank Offered Rate) the longtime global interest rate benchmark, will be phased out by 2021. LIBOR has been a reference rate used for the past 50 years to determine short-term interest rates, including base-rate derivatives, loans and other short-term instruments.

Both the Loan Syndications and Trading Association (LSTA) and the International Swaps and Derivatives Association (ISDA) have indicated that they will continue to monitor the situation and document reactions to and the evolution of alternative benchmarks.1 We note that many commercial loan agreements already provide for alternative rates in the event LIBOR is not available. Those alternatives typically involve reverting to a different (more expensive) rate or the lender proposing a new benchmark at its discretion.

It is clear that the transition away from LIBOR will be a slow process. The Alternative Reference Rates Committee established by the Federal Reserve Board indicated that the transition would start with derivative transactions, not loan transactions, and would be a “paced transition.” The Federal Reserve Bank of New York indicated on May 24 that the Federal Reserve will seek public comment on the composition and calculation methodology for the benchmark rates before adopting a final publication plan, and that the benchmark rates are not expected to be published until the first half of 2018. Many participants in the derivatives markets will probably wait until they receive guidance from ISDA, and major banks will probably not begin using the new benchmark until they receive guidance from the LSTA.

2. Industry Reponses: Initial Alternatives

The bank loan market has reacted in different ways:

  • Bank documents are silent and maintain the existing definition of LIBOR
  • Bank documents presently include a change in the definition of LIBOR that allows for the credit agreement to be amended to accommodate an alternative that is “reasonably acceptable” to the borrower and lender
  • Bank documents provide that, in connection with any amendment in the definition of LIBOR and/or related provisions in connection with the phase-out of the LIBOR offered rate as a general reference rate for syndicated credit facilities, amendments may be made with the consent of a majority (not 100%) of lenders

The tenor of the facility also appears to affect a bank’s willingness to entertain an alternative.

In the meantime, the ISDA market has been consistent in adopting the status quo option with counterparties opting to wait for ISDA to announce uniform changes.

3. Preparing: Things to Consider Now

It is important to note that this change is coming and to be alert to it when entering into new contracts or modifying existing contractual arrangements. As noted above, we anticipate that the market, lenders and associations will gravitate toward a new standard. As the LSTA has announced, the goal is to have an orderly process over a number of years.

For now, it would be prudent to conduct “due diligence” and assemble loan and swap documentation that uses LIBOR as its reference rate and determine what alternatives (if any) the documents contemplate in the event a LIBOR rate is not available.

Even after a new benchmark is in use, there will be a considerable volume of transactions outstanding that are governed by documents that use LIBOR as the primary benchmark for interest rate calculations. Accordingly, it is not too soon for participants in those transactions to review their documents to be sure they understand what will happen when LIBOR rates are no longer available. Some borrowers may want to amend their credit agreements to change the fallback language.

In new transactions, borrowers will want to pay careful attention to the interest rate benchmark that will be applicable if LIBOR is no longer available.

1 ISDA webinar materials, Development of Fallbacks for LIBOR and other Key IBORs, August 17, 2017; LSTA event materials, LIBOR: Why You Should Care . . . And Shouldn’t Panic, August 17, 2017.

© 2020 Foley & Lardner LLPNational Law Review, Volume VII, Number 298



About this Author

Laura Bilas, Foley Lardner Law Firm, Business and Finance Attorney

Laura L. Bilas is a partner and business lawyer with Foley & Lardner LLP. She is the chair of the firm’s Public Finance Practice and her practice is concentrated on public finance and structured lending matters. Ms. Bilas’ experience includes serving as bond counsel, borrower’s counsel, underwriter’s counsel, and credit enhancement provider’s counsel for numerous public finance and other structured transactions, including general obligation, special service area, special assessment, tax increment, multi-family housing, health care and industrial development...

Heidi A. Sorensen, Foley Lardner, Health Care Attorney, corporate integrity agreements Lawyer
Of Counsel

Heidi A. Sorensen is of counsel and a health care lawyer with Foley & Lardner LLP. Ms. Sorensen has extensive experience in health care fraud and abuse and compliance issues. In particular, Ms. Sorensen has worked with medical device and pharmaceutical manufacturers and corporate health care providers in the negotiation of False Claims Act settlements and corporate integrity agreements, and the resolution of matters under the Civil Monetary Penalties Law and the Office of Inspector General's exclusion authorities. She is a member of the Health Care and Life Sciences...

Emory Ireland, Foley Lardner, Financial Industry Lawyer, Information Security Attorney

Emory Ireland is a partner and business lawyer with Foley & Lardner LLP and a member of the Finance & Financial Institutions and Privacy, Security & Information Management Practices and the Sports Industry Team. He is a former chair of the Finance Practice.

Mr. Ireland has more than 40 years of experience representing clients in:

  • Sophisticated financing transactions

  • Loan workouts and bankruptcies

  • Derivative transactions

Heidi H. Jeffery, Foley Lardner, Municipal Finance Transaction Lawyer, private activity bond Attorney

Heidi H. Jeffery is a partner and business lawyer with Foley & Lardner LLP. Ms. Jeffery has experience in general municipal, private activity bond, housing, student loan, health care and senior living finance. In such transactions, she has served as bond counsel and counsel to developers, underwriters, credit enhancers, issuers and borrowers. Ms. Jeffery is a member and former vice chair of the firm’s Senior Living Team. She is also a member of the firm’s Finance & Financial Institutions, Health Care Finance, and Public Finance Practices and the Health Care...

David Reicher, Milwaukee, Finance Attorney, Derivatives Products

David M. Reicher, a partner and business lawyer with Foley & Lardner LLP, primarily represents end-users on various derivatives products, including credit, interest rate, currency, and total return derivatives. He is a member of the firm’s Finance & Financial Institutions, Public Finance, Education Finance, and Swaps and Derivatives Practices.

Mr. Reicher has represented providers and end-users in a variety of derivatives transactions since 1984. In the mid-1980s, he represented a provider of interest rate protection products (swaps, collars, caps) in connection with some of...