- Companies should be searching their files for any mention of LIBOR in any document.
- Contracts that reference LIBOR may need to be renegotiated with the other party.
Phasing Out LIBOR
The London Interbank Offered Rate (LIBOR) is being phased out on June 30, 2023, following allegations of manipulation. This has raised questions about what will replace LIBOR. The switch to another rate depends on the country where a company is located. While companies may still use LIBOR until June 2023, that extension is specific to the US dollar. Companies with exposure to British pounds or other currencies don’t have much time left to assess their situation and implement a transition.
LIBOR is a floating rate index for documents that reference floating interest rates. LIBOR is used in millions of contracts. Its phasing-out is a significant change for many companies, who will need to turn to other rates. This resource is based on the ACC 2021 Annual Meeting presentation, “LIBOR’s Unknown Successor: How the End of LIBOR Will Have Profound Ripple Effects” by Jonathan Newberg, Associate General Counsel, Crescent Heights and Alexey Surkov, Partner, Deloitte Risk & Financial Advisory.
In the United States, the Alternative Reference Rates Committee (ARRC) has recommended that businesses move to using the Secured Overnight Financing Rate (SOFR). The ARRC is a group of private market companies that the Federal Reserve Board convened to help with the transition from LIBOR.
The ARRC recently recommended that market participants slow their use of LIBOR, to transition to SOFR by December 31, 2021. LIBOR is pervasive, which makes the transition complicated.
Inventory Your Use and Exposure to LIBOR
Companies should inventory all their contracts and systems that involve LIBOR. Types of documents and systems involving LIBOR include:
• Floating Bond rates
• Contracts which reference LIBOR as a secondary rate
• Asset liability management
• Wholesale and retail loans
• Internal transfer pricing
• Pricing systems
• For those contracts that use LIBOR, a replacement rate must be determined.
• Options include replacing the contract with a new contract that uses another rate or, if the current contract includes fallback language, assessing if that fallback language is suitable.
• Some contracts include fallback language in the event LIBOR isn’t published on a specific day, but the clause might only envision situations where such non-publication is temporary.
• A challenge is to prioritize which contracts are the most important.
• Companies may run a SOFR swap in company files to see if SOFR is accepted in place of LIBOR under current contract wording.
New York has enacted statutes (N.Y. Gen. Oblig. Law §§ 18-400 to 18-403) to replace LIBOR, and US Congress is expected to take legislative action to limit liability for companies. Most financial institutions have a plan for addressing the transition and should be sending borrowers information about the plan. While there is no legal obligation in the US to use SOFR, most financial institutions are using SOFR.
Not an ACC member yet? Join ACC today and connect with peers