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As Halloween Approaches, 'Zombie' LIBOR Is Scheduled to Appear

On September 29, 2021, the UK Financial Conduct Authority (UK FCA) proposed that synthetic LIBOR rates (i.e. ‘Zombie’ LIBOR) be published next year for certain currencies, for a maximum of ten (10) years. In addition, it also proposed the prohibition of the new use of USD LIBOR (in most instances) after 2021, in line with US regulatory guidance.
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These proposals are scheduled to be finally determined as soon as practicable after October 20th but certainly by year-end.

Zombie LIBOR
As it will not be practicable to convert all legacy contracts to a new benchmark rate by year-end, the UK FCA will permit the use of synthetic LIBOR for Sterling LIBOR and Japanese Yen LIBOR contracts, though it does not intend to renew its permission to use the Zombie rate for Japanese Yen LIBOR after 2022. 

Notwithstanding the foregoing, the UK FCA emphasized that LIBOR users should continue to focus on the active transition to alternative benchmark rates rather than relying on synthetic LIBOR rates for these benchmarks.

USD LIBOR Prohibition
UK FCA
In the past, US regulators have recommended, and UK FCA and UK Prudential Regulation Authority regulatory expectations have been, that no new USD LIBOR instruments be entered into after this year but did not require that such use be discontinued.  This proposal, if finally determined, makes this guidance and expectations a requirement.

However, the UK FCA emphasized that the use of Zombie rates for Sterling and Japanese Yen LIBOR are not determinative of any future decisions with respect to USD LIBOR subsequent to June 30, 2023.

Survey Results[1]
The foregoing is critical in the US as 57% of all respondents recently stated that their institutions continued to reference USD LIBOR for new loans.  In addition, more than half of the respondents mentioned that it remained unclear/underdetermined when their institutions planned to stop using USD LIBOR for newly-issued loans.

The Firm’s experience has been that most new USD loans and renewed/extended/amended legacy loans continue to utilize USD LIBOR and a benchmark spread adjustment selected at the bank's sole discretion.

Conclusion
The UK FCA’s proposals are to assure the ‘smooth transition’ of LIBOR through (i) the use of temporary synthetic rates for Sterling and Yen legacy instruments, and (ii) the general requirement that no new USD LIBOR-based instruments be entered into after 2021.

Any other final determination would be too scary to contemplate…

[1] The information in this section is based upon ‘LIFE AFTER LIBOR: Recommendations for an Orderly Transition (2021 Survey)’ where SRS Acquiom commissioned Debtwire to interview 100 executives in the US financial industry in Q2 2021.  The executives, all of whom personally had a role in syndicated lending, were split evenly among investment banks, hedge funds, distressed debt funds, and direct lending funds.

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