McGuireWoods partners Donald Ensing, James Gelman, Jennifer Kafcas, Barlow Mann and Susan Rodriguez discussed key issues surrounding the transition from the benchmark London Interbank Offering Rate (LIBOR) in an interview for the July-August 2021 issue of Corporate Counsel Business Journal. All are members of the firm’s LIBOR transition team dedicated to advising financial institutions on benchmark reform implementation.
Banks and other market participants in the United States and United Kingdom are preparing to transition away from LIBOR, which is scheduled to be replaced at the end of 2021. But, as Kafcas pointed out, “preparedness varies by product type and jurisdiction.”
Rodriguez, who co-leads the firm’s financial institutions industry team with Ensing, said most U.S. institutions are heeding regulators’ warnings to cease issuance of new LIBOR-based contracts. But, she added, “we have seen challenges with deciding on appropriate replacement rates and, for some, dealing with the practical challenges of amending agreements.”
While the UK market has moved swiftly toward advancing a replacement rate for contracts denominated in British pounds, Ensing said progress in U.S. dollar (USD) LIBOR cash products market has been “a mixed bag.” He noted that U.S. regulators overseeing the LIBOR transition “require that USD financial instruments should have a ‘robust’ fallback path to a specific replacement benchmark — but without directing the use of any particular replacement benchmark.” The Secure Overnight Financing Rate (SOFR) has been adopted for products such as floating rate notes and government mortgage-backed securities, but the commercial loan market has lagged behind, he said.
Gelman said banks “will need to start offering options other than USD LIBOR in the second half of 2021, and corporate borrowers will need to evaluate the pros and cons of SOFR and its alternatives.”
Added Mann: “Borrowers face a similar challenge — corporate treasury groups will need time to adjust their own systems to the LIBOR alternatives being offered by their banks and lenders, and until the banks settle what those alternatives look like, treasurers are in a wait-and-see mode, and will need to catch up once their options become more clear.”
For more insights on the LIBOR transition, follow McGuireWoods’ LIBOR Transition Blog.