Progress on the reform of LIBOR has not stopped during the COVID-19 pandemic.
While the overall timing for LIBOR transition has remained unchanged, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) has recognized the need to introduce some flexibility in relation to the interim transition deadlines to ensure that lenders are able to continue to supply credit to the real economy and assist with economic recovery.
Although market participants will undoubtedly welcome this added flexibility, a smooth and timely transition will still require lenders to be proactive in reviewing and implementing their LIBOR transition plans.
On 29 April 2020, the RFRWG issued a statement on the impact of Coronavirus on the timeline for firms’ LIBOR transition plans (“Statement”).1 Although the key message conveyed by the Statement (itself referring to a joint statement of the FCA, the Bank of England and the RFRWG dated 25 March 20202) is that the overall timing for discontinuation of LIBOR will be maintained, interim deadlines have been adjusted to respond to the challenges posed by the COVID-19 pandemic.
While the bond market has already witnessed considerable progress in transitioning to SONIA, the pace of transition in the loan market has been considerably slower, and the RFRWG, the FCA and the Bank of England have recognized that, under the current circumstances, it may not be feasible to complete the transition away from LIBOR on all new sterling LIBOR-linked loans within the original time frame (i.e., by Q3 2020). The adjustment of the interim timelines will prompt lenders to rethink their transition plans and redefine their strategy.
What are lenders required to do and by when?
The table below sets out the new timeline and the actions required from lenders:
|Date||What needs to happen||Actions that lenders need to take|
|By Q3 2020||New non-LIBOR linked products to be made available to customers||Establish, approve and implement the use of new non-LIBOR linked products|
|By Q4 2020||Clear contractual arrangements to be included in all new and re-financed LIBOR-referencing loan products to facilitate conversion (pre-agreed conversion terms or an agreed process for renegotiation to SONIA or other alternatives)||Introduce conversion or fallback mechanisms in new LIBOR-referencing loan contracts (whether “new money” deals or refinancings)|
|By Q1 2021||No further issuance of sterling LIBORreferencing loan products expiring after Q4 2021||LIBOR-linked products to be discontinued
New non-LIBOR linked products to be used for any facilities expiring after Q4 2021 (or which can possibly be extended or renewed in the same terms)
|By Q4 2021||Discontinuation of LIBOR||Implement changes to all legacy deals to ensure that LIBOR will no longer be used|