As the world continues to deal with the COVID-19 pandemic, the end of 2021 deadline for the LIBOR transition has remained unchanged. However, certain deadlines along the way have been extended in recognition of the difficulties that market participants face in these tumultuous times.
In what follows, we explore the current timelines on the path to the transition from LIBOR.
Updated LIBOR deadlines in loan markets
In an initial statement on March 25, 2020, the FCA, Bank of England and Working Group on Sterling Risk-Free Reference Rates warned firms to not lose sight of the 2021 deadline, which was an early indication that the regulators would be unwavering in pushing ahead with the transition despite the COVID-19 situation.
However, in a subsequent joint statement, the FCA, Bank of England and Working Group recognised the challenges that COVID-19 has created for market participants, and accepted that keeping to the previous goal of completely transitioning from LIBOR in all new sterling LIBOR linked loans by the end of Q3 2020 was unrealistic. As such, they amended their recommendations as follows:
- By the end of Q3 2020 lenders should be in a position to offer non-LIBOR linked products to their customers.
- After the end of Q3 2020 lenders should include clear contractual arrangements in all new and re-financed LIBOR-referencing loan products to facilitate conversion ahead of end-2021 (through pre-agreed conversion terms or an agreed process for renegotiation).
- No new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 by the end of Q1 2021.
This revised timeline has been widely welcomed by market participants. However, it remains to be seen whether firms will be able to deal with the increased demand of renegotiating LIBOR linked products as they continue to deal with the fallout from the crisis created by COVID-19.
Bank of England pushes back LIBOR linked collateral haircut plans
The Bank of England has delayed the introduction of increased haircuts to apply to all LIBOR linked collateral, as previously discussed in our blog post of March 4, 2020.
The plans would have seen the first increase being introduced from October 1, 2020. This has now been postponed to April 1, 2021 with a further increase from September 1, 2021. From December 31, 2021 no LIBOR liked collateral will be accepted by the Bank of England.
Despite the delays introduced by this amended timeline, market participants should be careful to consider whether new issuances can be linked to non-LIBOR rates in order to minimise the number of legacy contracts that will require renegotiation before the end of 2021 deadline, and continue to engage with their counterparties in legacy contracts on the transition to alternative rates.
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.