Pub. 6 2018 Issue 2

www.uba.org 14 L IBOR’s days are numbered and lenders will need to respond. In July 2017, the UK’s Financial Conduct Au- thority (FCA), which regulates LIBOR, announced that it will stop requiring reference banks to quote LIBOR by the end of 2021. The reference banks may choose to continue to quote LIBOR after 2021, but many observers believe they are unlikely to do so and central banks and industry groups are working to develop alternative benchmark rates. LIBOR (London Interbank Offered Rate) is based on the quoted rates of a panel of reference banks. The quotes represent the rates at which these banks are able to borrow in short-term money markets. Apart from overnight transactions, banks no longer borrow much in these markets. While discussing the future of LIBOR, Andrew Bailey, the chief executive of the FCA, explained that “the underlying market that LIBOR seeks to measure— the market for unsecured wholesale term lending to banks—is no longer sufficient- ly active.” Due to this lack of liquidity and a series of well-publicized scandals involving rate manipulation, the FCA called for the phase-out of LIBOR and a transition to alternative rates based on a more robust set of market transactions. The impact of the phase-out of LIBOR is substantial. LIBOR is used as a bench- mark rate to calculate floating and adjust- able rates on trillions of dollars of loans, bonds, derivatives and other financial contracts. Many of these agreements have maturity dates extending past 2021, when LIBOR may no longer be quoted. It is common for loan documents to contain fallback language to account for a time when LIBOR is not available. In the event LIBOR is not quoted, these loan documents will use some other rate or the parties will have rights to select a new rate. Loan Documents that do not account for the end of LIBOR will be subject to considerable uncertainty. It is conceivable that parties to some of these loans will end up in court to argue over the fate of these loans. When LIBOR is no longer quoted, these contracts will lack an essential term of the contract: the interest rate agreed upon by the parties. It is unclear whether courts will hold that these contracts are no longer enforceable or if they will rule that some other meth- od of calculating interest should be used. Any ruling generates risk. Bailey warns that uncertainty “depends on the prepa- rations that the users of LIBOR make in either switching contracts from the cur- rent basis of LIBOR or ensuring that their contracts have robust fallbacks in place that allow for a smooth transition.” Lenders should review their loans to identify any that reference LIBOR and mature or may mature after 2021, and they should understand what will hap- pen to these loans when LIBOR is not quoted. Loans with no fallback language may need to be amended to either use a different rate or add fallback language. Lenders should review fallback language in existing loan documents to ensure it is still practical and will function smoothly after 2021. Some loan documents have fallback language that is inadequate. A common provision states that, if LIBOR is not quoted, the benchmark rate will default to the LIBOR rate last quoted. This mechanism may work well if LIBOR is disrupted and the parties anticipate that LIBOR will be quoted again in the fu- Preparing Loans for the End of LIBOR By Braden Parker, Holland & Hart