Kevin Scott writes:
In case you missed it last week, The Wall Street Journal and others reported (sub. req.) that the rate index LIBOR is going to be discontinued by the end of 2021. LIBOR has been the base index for most all variable rate loans, bonds, interest rate swaps and other instruments for many years. Various industry working groups are trying to establish an alternative index to replace LIBOR.
While most of the loan documents utilized over the years already have provisions that take effect if LIBOR is discontinued, it is doubtful that those provisions received much, if any, scrutiny.
For companies or individuals with LIBOR loans, please consider the following:
- If the loan matures prior to December 2021, there should be nothing to do. However, if the loan is a revolving line of credit, with annual renewals, even that loan will need to be reviewed.
- If the loan extends beyond December 2021, they should review the documents to see if there is a replacement mechanism that makes economic sense and actually works. Below are a few examples:
LIBOR: for any Interest Period for a LIBOR Loan, the per annum rate of interest (rounded up, if necessary, to the nearest 1/8th of 1%) determined by Agent at or about 11:00 a.m. (London time) two Business Days prior to such Interest Period, for a term equivalent to such period, equal to the London Interbank Offered Rate, or comparable or successor rate approved by Agent, as published on the applicable Reuters screen page (or other commercially available source designated by Agent from time to time); provided, that any such comparable or successor rate shall be applied by Agent, if administratively feasible, in a manner consistent with market practice.
If, for any reason, such rate is not available, the term LIBOR Rate shall mean, with respect to any LIBOR Rate Loan for the LIBOR Interest Period applicable thereto, the rate of interest per annum determined by Purchaser to be the average rate of interest per annum at which deposits in Dollars are offered for such LIBOR Interest Period to major banks in London, England at approximately 11:00 A.M. (London time) 2 London Business Days prior to the first day of such LIBOR Interest Period for a term comparable to such LIBOR Interest Period.
As you can see, both examples rely on the lender to choose the replacement index. The first example probably works. The second, which continues the reliance on London-based banks, probably does not work, as it was manipulation of the rate index in London that caused the demise of the index in the first place.
- For all new loans, the successor index language should be reviewed carefully to make sure it is clearly written and commercially reasonable.
I am sure we will all be hearing a lot about this in the coming months and I suspect that banks will begin reviewing their documents and proposing amendments as required.
Kevin Scott is a partner in the firm’s Corporate Department, resident in its Philadelphia office.