Libor leaves nearly $2tn of loans in limbo

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Nearly $2trillion in loans may need to have their documentation revised following the switch off of the LIBOR (and other IBOR) benchmarks in 2021. The world’s largest financial regulators, including the Bank of England and the Federal Reserve, are encouraging banks to move away from the benchmark because it no longer accurately reflects actual activity between lenders. However, analysis from global law firm Linklaters shows that IBORs remain to central to thousands of mortgages and consumer loans with $1.97trillion worth of loans referencing Libor set to mature after 2021.

Although LIBOR is likely to be replaced with risk-free rates such as the Secured Overnight Funding Rate for new US dollar loans and the unsecured Sterling Overnight Index Average for sterling loans, millions for documents will need to be reworked for loans that reference LIBOR but will mature after the switch off date.

Benedict James, Banking partner at Linklaters, says: “This could create a serious headache for the industry. There is a huge volume of loan documentation that needs to be changed, not just to replace the references to LIBOR (or other IBORs) in the interest rate provisions, but also secondary mechanics such as fallback provision, timing conventions market disruption, credit spreads etc. This will be a very significant undertaking, at a time when other issues (such as Brexit) are already using up a lot of legal and technical bandwidth within banks.”

James continues: “It is likely that the market will develop standard approaches once the alternative reference rates have been agreed. These will require individual consideration in relation to each facility agreement to ensure appropriate contractual amendments are made for the particular situation. There’s a huge amount of work that needs to be done. 2021 may seem a long way off, but in reality it doesn’t give a huge amount of time to achieve such a major industry shift. In part this is because regulators initially focused – probably too much – on the derivatives market, without paying enough attention to the real lending markets. It may be that a technology or AI solution is the only way to address the volume of work required, and Linklaters are working on developing such a solution.”