
Publication
International Restructuring Newswire
Welcome to the Q2 2025 edition of the Norton Rose Fulbright International Restructuring Newswire.
Global | Publication | October 2020
The transition from LIBOR to alternative risk free rates (RFRs) represents one of the biggest changes to the financial services industry, including those providing trust and agency services. There is increasing pressure on market participants from global regulators to take action to address LIBOR transition in both new and legacy transactions. Given the volume of product and processes affected, LIBOR transition will entail considerable work and risk.
This briefing considers the issues arising from LIBOR transaction for agents appointed under Loan Market Association (LMA) based loan agreements.
On 16 January 2020, the Bank of England issued a public statement advising market participants that 2020 is a critical year for LIBOR transition and “firms need to accelerate efforts to ensure they are prepared for LIBOR cessation by end-2021”. At the same time, the UK Working Group on Sterling Risk-Free Reference Rates published a roadmap for LIBOR transition that included (i) ceasing the issuance of cash products linked to sterling LIBOR by end-Q3 2020 and (ii) establishing a framework for the transition of legacy LIBOR products in order to significantly reduce the stock of LIBOR referencing contracts by Q1 2021.
In relation to the legacy LIBOR contracts, any change from LIBOR to RFRs will generally need to be accompanied by a “spread adjustment” to compensate for the fact that RFRs are generally lower than the LIBOR for the same currency. Industry groups have been consulting upon methods by which that could be determined1. The International Swaps and Derivatives Association (ISDA) published a report on 15 November 20192 summarising responses to its consultation on final parameters for the spread and term adjustments in derivatives fallbacks for key IBORs. The ISDA report found that a majority of respondents preferred the calculation of a spread adjustment to be based on a historical median of the difference between the relevant RFR and LIBOR over a five-year lookback period (as opposed to the alternative option of a historical trimmed mean over a ten-year lookback period). However, recent LMA guidance3 cautions that the historical mean/median approach should be viewed in context and may not be appropriate method for determining an adjustment in forward looking loan documents. The LMA4 noted that in the ABP Ports transaction (which was a transition from LIBOR to a SONIA linked floating rate note) the forward market was used to determine the credit adjustment spread. This is possible due to the active SONIA derivatives market. However, it may not be a suitable approach for other risk free rates where the derivatives market is less well established.
Aside from operational issues mentioned above, the main concern for agents will be the amendment or “repapering” of legacy LIBOR transactions.
In most cases, lenders and, to a lesser extent, borrowers can be expected to take the lead in identifying and implementing any changes to legacy transactions. The LMA has released a proposed form of amendments to transition from LIBOR to RFRs, but notably this is silent on the appropriate quantum of spread adjustment.
The main points to note in this context of amending legacy transactions are:
The following paragraphs consider the issues for agents where a legacy transaction is not amended to accommodate LIBOR transition.
For LMA based facilities8, the following provisions will be relevant upon LIBOR being unavailable:
The consensus view is that LMA facilities will ultimately default to the use of the lender’s costs of funds if LIBOR is permanently unavailable. This on the basis that the provision within the definition of “Screen Rate” mentioned above will not apply and use of historic Screen Rates and Reference Banks under the market disruption clause is considered unlikely and/or unworkable9.
It is generally acknowledged that “costs of funds” arrangement under the LMA market disruption clause provisions was intended to operate as an emergency short-term solution and not intended to be used indefinitely. The use of cost of funds as a fallback where LIBOR is unavailable for a prolonged period is likely to be problematic for a number of reasons:
More generally, fallback provisions will vary from contract to contract because the LMA provisions have evolved over time and/or amendments negotiated for specific transactions. This leads to considerable scope for disputes as to how a fallback provision should operate in any specific transaction.
New loan agreements should now accommodate LIBOR transition and/or use the alternative RFRs rather than LIBOR. The LMA has released standard wording for these purposes which should be included in new transactions.
Lenders should take the initiative in amending legacy LIBOR transactions, but agents should not assume that all legacy LIBOR transactions will be amended. The clear concern from an agency perspective is the risk of being faced with a cliff edge of so called “tough legacy” transactions at the end of 2021. With this in mind, agents are recommended to take the following steps to effectively position themselves to deal with legacy LIBOR transactions:
Publication
Welcome to the Q2 2025 edition of the Norton Rose Fulbright International Restructuring Newswire.
Publication
Another compliance deadline is approaching under the federal Pay Equity Act – federally regulated employers are required to file an annual statement with the Office of the Pay Equity Commissioner on or before June 30, 2025, if they posted a pay equity plan in the previous year.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2025