Latest on the LIBOR transition front

July 09, 2020

Corporate Trust Alert

Author(s): Erik Schneider

It’s been a busy week on the LIBOR transition front. Trustees should take note of several key updates released by the Alternative Reference Rates Committee (“ARRC”), and also a statement by the Loan Syndications & Trading Association (“LSTA”) clarifying announcements made by certain members of the UK Financial Conduct Authority (“FCA”), and the UK Treasury regarding the timing of LIBOR’s cessation.

It’s been a busy week for the Alternative Reference Rates Committee (“ARRC”), which released several key updates related to the LIBOR transition:

  1. its recommended “hardwire” fallback language for Syndicated Loans, thus revising the original hardwired fallback language released in April 2019; [1]
  2. its final recommended fallback language for new variable rate Private Student Loans [2] and conventions for using SOFR in Student Loans [3]
  3. its guidance entitled “Internal Systems and Processes: Transition Aid for SOFR Adoption,” which it describes as building upon its previous publications, “Users Guide to SOFR” (April 2019) and “Practical Implementation Checklist for SOFR Adoption” (September 2019), to support market participants in transitioning to SOFR as an alternative to USD LIBOR; [4] and
  4. further details regarding its recommendation of spread adjustments for cash products referencing U.S. dollar LIBOR. [5]

In particular trustees and calculation agents should note that the Transition Aid for SOFR Adoption (no. 3 above) broadly classifies transition activities into the various categories, each with one-page summary of sub-topics, listing transaction activities for market participants to consider, as well as sections on upstream and downstream areas that may be affected by the transition. The summaries also identify dependencies that may influence the timing and sequence of transition activities.

Likewise, the recommended spread adjustments (no. 4 above) provided two important technical details: for cash products other than consumer products, the ARRC’s recommended spread adjustment will match the value of ISDA’s spread adjustments to U.S. dollar LIBOR; and for all cash products, if a pre-cessation event is operative, the ARRC’s recommended five-year historical median spread adjustments will be determined at the same time as the ISDA’s spread adjustments, which will be at the time of any announcement that LIBOR will or has cease(d) or will or has become no longer representative.

In addition, on July 8, 2020, the ARRC announced the launch of its “SOFR Summer Series,” a series of six (6) free webinars taking place in July and August designed to educate the market about the development and strengths of SOFR, progress made in transition away from LIBOR, and recommendations for ensuring readiness for the end of LIBOR.[6]

LSTA publishes statement regarding possible FCA announcement in 2020 that LIBOR will end

Separately, the Loan Syndications & Trading Association (“LSTA”) released a statement [7] clarifying some remarks made by certain members of the UK Financial Conduct Authority’s (“FCA”) and the UK Treasury, which some market participants interpreted to mean that LIBOR may end this year or that LIBOR might continue well past December 2021. The LSTA clarified that neither interpretation is correct. The confusion arose because although the FCA has stated that it will not require LIBOR panel banks to make LIBOR submissions beyond the end of 2021, there has been as yet, technically speaking, no official announcement that LIBOR will end as of a certain date. Market participants recognize, of course, that there should be no expectation of availability beyond the end of 2021. Trustees and calculation agents should note, however, that if and when the FCA makes such an official announcement, that would constitute a “benchmark transition event” under the ARRC’s and ISDA’s fallback language.

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The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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