The impact of COVID-19 on LIBOR transition plans

In 2017, the Financial Conduct Authority (FCA) announced its intention to stop compiling interest rates…

Introduction:

In 2017, the Financial Conduct Authority (FCA) announced its intention to stop compiling the London Interbank Offered Rate (LIBOR) benchmark interest rate by the end of 2021, as the FCA determined that the method of calculation LIBOR no longer conforms in practice to internationally accepted principles for reference interest rates. LIBOR is currently scheduled to transition to SONIA (Sterling Overnight Index Average), an alternative overnight risk-free rate for sterling transactions administered by the Bank of England, after the end of 2021. Other rates Overnight risk-free alternatives, such as The SOFR (Secured Overnight Financing Rate) for transactions in USD and the €STR (Euro Short-Term Rate) for transactions in EUR will also be transferred on this date. As LIBOR currently forms the basis of contracts affecting banks, asset managers, insurers and corporations around the world, a smooth transition is essential. In this article, we look at the impact of COVID-19 on companies’ LIBOR transition plans over the coming months.

LIBOR transition plans:

In a joint statement dated March 25, 2020 (available here), the FCA, the Bank of England and members of the British Pound Risk-Free Benchmark Task Force (the Task Force) have confirmed that, despite the COVID-19 pandemic, businesses cannot not expect LIBOR to be released after the end of 2021 and that should remain the target date that all companies must meet.

The FCA has acknowledged that while many preparations for the LIBOR transition may continue as planned, some aspects of the transition programs have been impacted by COVID-19. It was also noted that some parts of the UK market (such as the lending market) have made less progress in the transition and are still too dependent on LIBOR, which would impact some of the intermediate stages of transmission.

In another statement issued on April 29, 2020 (available here) (the Statement), the Task Force acknowledged the challenges posed by COVID-19. However, the working group noted that there had been continuous progress on the LIBOR transition (for example, they mentioned the first syndicated loan linked to SONIA and SOFR, the first bilateral loan referring to SONIA in the social housing and another successful consent solicitation to convert a legacy bond referencing LIBOR). It was also noted that the transition to SONIA in the bond market is largely complete. Regarding the lending market, the statement notes that lenders will continue to strive to make SONIA-based products available before the end of the third quarter of 2020 and that some borrowers will be ready to use these alternative products by the.

However, the FCA, the Bank of England and the task force have acknowledged that it is not possible to complete the transition for all new sterling LIBOR-linked loans before the original target date (Q3 2020) . The statement also acknowledged that there will likely be continued use of LIBOR-referenced lending products in the fourth quarter of 2020, particularly to maintain the steady flow of credit to the real economy.

In this regard, the Task Force recommended the following actions:

  • By the end of the third quarter of 2020, lenders should be able to offer their clients non-LIBOR products;
  • After the end of Q3 2020, lenders, working with their borrowers, should include clear contractual terms in all new and refinanced LIBOR-referenced loan products to facilitate conversion before the end of 2021 through pre-agreed conversion terms or an agreed process. for renegotiation, to SONIA or other alternatives; and
  • Issuance of loan products referencing GBP LIBOR that expire after the end of 2021 is expected to cease by the end of the first quarter of 2021.

The FCA, the Bank of England and the task force reaffirmed their commitment to maintaining the momentum of the LIBOR transition, despite the economic uncertainty caused by COVID-19, and underlined their focus on a number of areas keys, including:

  • Publish the analysis and reflections of the working group on the treatment of “difficult to manage” contracts;
  • Building on the strong consensus on how to calculate a fair credit spread adjustment in legacy treasury products to facilitate the transition from LIBOR in cash markets; and
  • As plans and work arrangements disrupted by COVID-19 begin to stabilize, the task force and its members will intensify communication with clients who need to move away from LIBOR as part of the transition.

Conclusion:

Given the extent to which market participants currently rely on LIBOR, it is essential that a smooth transition is achieved. COVID-19 has clearly impacted the ability of businesses to prepare for the transition and has undoubtedly made an already complex task even more difficult. Along with other international authorities, the FCA, the Bank of England and the Task Force will continue to monitor and assess the evolving impact of the pandemic on companies’ LIBOR transition times and update the market. as soon as possible. The FCA said this transition remains a critical task that will strengthen the global financial system.

DISCLAIMER: This document is provided for informational purposes only and does not purport to constitute legal advice. If you have any questions or would like further information regarding any of the above topics, please refer to the contacts above or your usual contact at Dillon Eustace.

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