Ready or Not, Here it Comes - LIBOR Transition’s Endgame in the Loan Markets

The endgame of the LIBOR transition is imminent, if not already upon us. LIBOR will cease for all currencies other than USD on 31 December 2021. Ready or not, loan market participants need to deal with it.

In this client alert, we will examine the state of play of LIBOR transition in the loan markets in each LIBOR jurisdiction in the short time left until the end of this year. We will also discuss the post-2021 environment for loan interest rates, including with respect to multicurrency facilities.

Please visit Baker McKenzie's LIBOR Transition Hub for further information concerning the LIBOR transition.

Key takeaways

1. LIBOR will cease for all currencies (other than USD) on 31 December 2021.
   
   
2. The Financial Standards Board (FSB)¹ and local regulators and working groups have recommended that market participants use robust alternative reference rates to LIBOR in new contracts wherever possible.
   
   
3. Most USD LIBOR tenors will continue until 30 June 2023, but this longer period is intended solely to allow legacy USD LIBOR transactions to roll off. US banks are restricted from originating new USD LIBOR loans after 31 December 2021. Other regulators, including in the UK, are similarly encouraging the entities they supervise to meet this same deadline.
   
   
4. Risk-free rates (RFRs) have been adopted in the jurisdiction of each LIBOR currency. These rates are overnight rates. For loan transactions, RFRs may be applied in arrears using compounding.
   
   
5. Forward term rates based on an RFR have been recommended for loan transactions in the US (Term SOFR) and in Japan (TORF). In no other LIBOR jurisdiction has a similar forward term rate based on an RFR been recommended for general use in loan transactions. Although the UK has two versions of a forward term rate (Term SONIA), it has been recommended for use only in specific limited circumstances.
   
   
6. The euro zone and Japan have followed a multiple rate approach. Their legacy non-LIBOR rates, EURIBOR and TIBOR, respectively, will continue to exist following LIBOR cessation alongside the RFRs for such jurisdictions.
   
   
7. After LIBOR ceases, synthetic GBP and JPY LIBOR will be available for legacy contracts (but not new contracts) during 2022. These rates may be available until 2031, although there is no guarantee of availability after 2022.
   
   
8. Tough legacy issues remain. A New York state law is in effect to address such issues in contracts governed by New York law. The US and the UK have either enacted or considered further legislation to address tough legacy issues. The European Commission has designated statutory replacements for CHF LIBOR (SARON) and EONIA (€STR) in an attempt to address tough legacy issues.
   
   
9. Although credit-sensitive rates have been explored for use in place of RFRs in loan transactions, regulatory acceptance of them has been mixed.
   
   
10. Multicurrency facilities are likely to be more complicated than they were during LIBOR's heyday.

 
¹ FSB, Progress Report to the G20 on LIBOR Transition Issues (6 July 2021).