The announcement by Andrew Bailey (Chief Executive of the FCA) last year that the FCA would no longer compel or encourage panel banks to contribute quotations for the purposes of calculating LIBOR beyond 2021 has left the future of LIBOR in doubt – while not necessarily spelling the end of LIBOR as we know it, the FCA has made clear its focus is on developing (and smoothly transitioning towards) alternative rates.
In light of that, all eyes turn to the Loan Market Association (LMA) which has just published its revised Replacement of Screen Rate Clause for use in its standard loan documentation following consultation with LMA members and the Association of Corporate Treasurers. Cleary, until there is more certainty in the market on how replacement benchmark rates for LIBOR (and indeed EURIBOR, which is currently subject to its own process of review in order to receive authorisation in terms of the EU Benchmarks Regulation by 1 January 2020, with fallback positions also being considered) are to be calculated, careful consideration of drafting issues is needed. That’s obviously particularly true for those loans being entered into now with a term beyond 2021.
Hence the new wording suggested by the LMA which seeks to offer parties greater flexibility in how a reference rate is calculated. Much depends on the circumstances/composition of the parties and the deal itself as to whether the standard wording may need further revision. In any event, the key change from the previous version of the clause is the level of consent required – the new wording allows amendments to be made to include a replacement benchmark which:
- is formally designated as LIBOR’s replacement by the LIBOR administrator (or other appropriate regulator);
- is otherwise accepted by the relevant markets as the appropriate successor; or
- is deemed an appropriate successor by the majority lenders and obligors.
Clearly, there is much more to come on this topic – watch this space.