Losing LIBOR in the Capital Markets — A Reprieve?

As reported in our previous alert “Losing LIBOR in the Capital Markets — Are You Ready?,” the anticipated date for discontinuation of the London Interbank Offered Rate (LIBOR) is approaching. While LIBOR is a widely used benchmark rate for U.S. dollar-denominated floating-rate debt securities and other financial products, LIBOR was the subject of widespread market manipulation and ineffective regulation. In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (FCA) announced its intention to stop persuading or compelling banks to submit rates for the calculation of LIBOR to its administrator after 2021. This announcement strengthened the objective of the Alternative Reference Rates Committee (ARRC), a committee convened by U.S. regulators to identify LIBOR alternatives in the U.S. market.

While market participants were warned that LIBOR may cease to exist after 2021, the ICE Benchmark Administration Limited (IBA), as the administrator of LIBOR, recently announced the results of a November 2020 consultation regarding the upcoming discontinuation. Although certain lesser-utilized U.S. dollar-denominated LIBOR tenors will cease to be published after December 31, 2021, the IBA announced it will continue publishing widely used tenors (such as one-month LIBOR and three-month LIBOR) until June 30, 2023. The FCA’s support for the extension provides confidence regarding the ongoing representativeness of the continuing U.S. dollar-denominated LIBOR tenors until June 30, 2023.

The extension of widely used U.S. dollar-denominated LIBOR tenors provides issuers of LIBOR-linked debt securities with additional time to prepare for LIBOR discontinuance. In particular, the extension may, in many cases, allow for a natural end to LIBOR-linked debt securities through maturation or the exercise by issuers of redemption rights.

Issuers should not take the extension of certain U.S. dollar-denominated LIBOR tenors through mid-2023 as an opportunity to issue more LIBOR products. Instead, issuers should renew efforts to identify LIBOR-linked debt securities that will not mature or be redeemed by June 30, 2023 and broaden efforts to transition to new rates such as the Secured Overnight Financing Rate (SOFR). If an issuer must issue a new security linked to LIBOR in 2021, fallback language in line with that published by the ARRC to provide a defined path to an alternative rate for LIBOR should be incorporated. The use of fallback language will ease administrative burden past mid-2023 and provide investors with greater replacement clarity. U.S. banking regulators have indicated that the use of U.S. dollar-denominated LIBOR after December 31, 2021 will raise safety and soundness risks for banks.

LIBOR-linked debt securities that do not mature by, or cannot be redeemed before, June 30, 2023 will continue to challenge issuers; however, the ARRC has proposed legislation to address outstanding securities that lack fallbacks for LIBOR. While a legislative solution for LIBOR-based debt securities would ease issuer burden, it is unclear whether sufficient momentum will build. Issuers should continue to evaluate liability management transactions as potential solutions, as noted in our previous alert, and view the reprieve granted for certain LIBOR tenors until June 30, 2023 as being solely for the wind-down of existing LIBOR-linked debt.