For the past couple of years UK businesses have been receiving prompts and reminders about the need to prepare for the phase out of LIBOR and the transition to risk-free rates. As we get closer to the anticipated phase-out date of the end of 2021 the need to act is becoming more urgent and many businesses are now engaged in conversations with their banks to discuss the options available to them. Banks and other lenders are developing strategies to manage the repapering of their loan books where necessary. Aided by technology such as Luminance, a leading artificial intelligence platform used by Bird & Bird, the task of identifying LIBOR exposure in legacy contracts can be completed far more quickly and efficiently than would have been the case historically.
At one level the scale of the task is daunting. LIBOR is often referred to as “the world’s most important number” for the simple reason that assets with a value equivalent to hundreds of trillions of pounds are benchmarked against it and the process for its phase out is well underway. However, in many cases the steps required to be taken to understand the issues arising for individual businesses and lenders are relatively straightforward and we are helping to guide our clients through the options currently available to them across markets.
We have recorded a presentation setting out the background to LIBOR phase out, the timeline and advice on practical steps as well as the issues for parties to contracts referencing LIBOR with a post 2021 maturity date. Viewers should be aware that this is a fast moving area and since this presentation was prepared an announcement from the ICE Benchmark Administration (IBA) regarding consultation on the proposed date by which it will cease publication of USD LIBOR suggests that final publications of a selection of certain USD LIBOR rates may continue to the end of June 2023. NB: The same does not apply to GBP LIBOR, EUR LIBOR, CHF LIBOR or JPY LIBOR (all tenors) in respect of which the IBA is consulting on ceasing publication at the end of 2021, per their announcement to this effect of 18 November 2020.
We have also recorded a presentation looking in more detail at one of the choices to be made when drafting agreements using risk-free reference rates compounded in arrears, that is whether to use “lookback with observation shift” or “lookback without observation shift” and the possible consequences of either option.
There is lots of information available on the internet in relation to the LIBOR transition and we have set out some useful links below.
Bank of England – Transition to sterling risk-free rates from LIBOR
FCA – Transition from LIBOR
ICE Benchmark Administration