In his speech in July 2019, Andrew Bailey called for public debate on potential outcomes for legacy contracts that prove unable to convert or be amended to include fallbacks to risk free rates before the discontinuance of LIBOR. In response to that speech, the Working Group on Sterling Risk-Free Reference Rates last week published a paper on how to catalyse the transition of such ‘tough legacy’ contracts away from LIBOR.
To address ‘tough legacy’ contracts, the Working Group has proposed that the UK Government consider introducing legislation. They note that in the U.S., the Alternative Reference Rates Committee (the ARRC) has proposed a similar approach and there would be benefits from the international consistency that would result from the UK mirroring this.
As the Working Group has not indicated what they envision the UK’s legislative relief to look like, it is worth considering the approach taken by the ARRC as an indicator of how the UK may approach this issue. The ARRC recommends that legislation should be introduced to:
- prohibit a party from refusing to perform its contractual obligations or declaring a breach of contract as a result of LIBOR discontinuance or the use of the legislation’s recommended benchmark replacement;
- establish that the recommended benchmark replacement is a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR; and
- provide a safe harbor from litigation for the use of the recommended benchmark replacement.
In addition, the ARRC’s proposed legislation would mandatorily:
- override existing fallback language that references LIBOR and instead require the use of the legislation’s recommended benchmark replacement;
- nullify existing fallback language that requires polling for LIBOR or other interbank funding rates; and
- insert the recommended benchmark replacement as the LIBOR fallback in contracts that do not have any existing fallback language.
Support for such a legislative fix may increase due to the COVID-19 pandemic, as some borrowers’ resources have become stretched, giving rise to further difficulties in the renegotiation of LIBOR-linked contracts. However, despite the Working Group’s recommendation, it recognises that a legislative fix may never materialise, and indeed the UK Financial Conduct Authority has previously warned market participants against relying on such a fix. As such, the Working Group calls on market participants to continue to engage with their counterparties to actively transition all of their LIBOR-linked contracts, including those ‘tough legacy’ contracts.
Please contact any of the authors of this briefing or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.