Recent announcements by the ICE Benchmark Administration (ICE) and the Alternative Reference Rates Committee (ARRC) with respect to LIBOR will have a significant implications for lenders, borrowers and other financial services providers and users.
On March 5, 2021, ICE announced that it intends to cease publishing LIBOR immediately after:
(1) December 31, 2021, with respect to all GBP, EUR, CHF, and JPY LIBOR settings, as well as 1-week and 2-week USD LIBOR settings, and
(2) June 30, 2023 with respect to Overnight and 1-, 3-, 6-, and 12-month USD LIBOR settings.
After these dates, absent other changes or reversals, LIBOR will no longer be a reliable index rate.
On March 8, 2021, ARRC confirmed that ICE’s announcements constitute a “Benchmark Transition Event” under ARRC-recommended LIBOR “fallback language”. This fallback language was developed by ARRC and has been incorporated by many lenders into their loan agreements to provide a framework for the eventual transition away from LIBOR. The fallback language may require certain notices to be given or other actions to be taken as a result of the now-confirmed Benchmark Transition Event, though the occurrence of a Benchmark Transition Event does not typically require immediate action under the ARRC-recommended fallback language. Parties should carefully review the terms of applicable fallback language to see what impact these developments may have on their situation.
Assuming the applicable fallback language does not dictate otherwise, parties may continue to use LIBOR and should ensure all current and future transactions contain the ARRC-recommended fallback language. Alternatively, the parties could transition to a new reference rate, such as the Secured Overnight Financing Rate (SOFR), in advance of the inevitable end of LIBOR.
Aside from particular language in existing and future agreements, but of particular importance to banks, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have announced that entering into new agreements after December 31, 2021, that use LIBOR as a reference rate would create safety and soundness risks, and these agencies “will examine bank practices accordingly”.
These recent events confirm that LIBOR is going away. All users should continue to transition away from LIBOR and do so with urgency. For assistance with LIBOR transition matters, contact Levi Smith.