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LIBOR CESSATION UPDATE

December 4, 2020

The finance community has been focused on December 31, 2021 as the day on which U.S. Dollar LIBOR would cease to be published, and the date by which credit agreements (among other financial instruments) must adopt an alternative reference rate for interest calculations.  On November 30, 2020, ICE Benchmark Administration Limited, the administrator of LIBOR (“IBA”) indicated that in early December 2020 it expects to consult on its intention to cease the publication of:

  • The one-week and two-month USD LIBOR interest periods, after December 31, 2021; and

  • The overnight and one-, three-, six- and 12-month USD LIBOR interest periods, after June 30, 2023.

In response, and also on November 30, 2020, the Alternative Reference Rates Committee (a group of private market participants convened by the Federal Reserve Board and the Federal Reserve Bank of NY to identify alternative reference rates for USD LIBOR) publicly applauded the IBA announcement.  Further, the Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency issued a joint statement which included statements to the following:

  • Banks are encouraged to transition away from USD LIBOR "as soon as practicable"; and

  • Banks are encouraged to cease entering into new credit agreements that use USD LIBOR as a reference rate "as soon as practicable" and, in any event, by December 31, 2021.

Here are a few takeaways for our middle market lending clients[1]:

  1. For existing credit agreements that contain a two-month USD LIBOR option, the agent for the lenders should notify the borrower that the two-month option will cease to exist (and will no longer be an option available under the credit agreement) at the designated date. Others have suggested that borrowers and lenders should amend the credit agreement to formally remove the two-month USD LIBOR option, but that strikes us as requiring too much time and effort for a result that will be obvious to all market participants.

  2. Existing credit agreements with an expiry date after June 30, 2023 should be amended, if they have not already been amended, to include the appropriate LIBOR fallback language.

  3. Credit agreements entered into after December 31, 2021 (at the latest) should use a new reference rate instead of USD LIBOR. Presumably, in the coming months the market will coalesce around a variation of SOFR (Secured Overnight Financing Rate) as the alternative market reference rate.

  4. For existing credit agreements that are set to expire before June 30, 2023, borrowers and lenders can consider doing nothing (leaving the agreement in its present form) as USD LIBOR will exist for the remaining life of the agreement.

  5. For credit agreements for which you are a lender, but not the agent, as we get closer to December 31, 2021, consider consulting with the agent to see what its plans are for that credit agreement. If (as is anticipated) the initial differential between recommended SOFR and USD LIBOR is not material, co-lenders may be comfortable receiving new pricing information from their agents in the normal course.

  6. The foregoing will likely result in lenders' portfolios containing both (a) credit agreements that will continue to use USD LIBOR through June 30, 2023, and (b) commencing at the latest on January 1, 2022, credit agreements that use a new reference rate (likely some variation of SOFR).  Lenders should ensure that their operations systems can handle the variations.

[1] In each case, these takeaways are subject to the IBA following through on its stated intentions above.



December 4, 2020

Questions? Please contact:

Commercial Finance Practice Group
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