1489313 - Hogan Lovells FIS Horizons 2021 update - Flipbook - Page 34
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Starting to repaper legacy LIBOR products
What about the “tough legacy” contracts?
The £RFRWG requires firms to have established
a clear framework to manage transition of legacy
LIBOR products which will expire after 2021 and
to have started to accelerate reduction of sterling
LIBOR referencing contracts by the end of March
2021. The FSB and the ARRC timetables set an
aim of mid-2021 for this to commence.
This should give firms sufficient time to finish
the huge task of reviewing and sorting legacy
product types and preparing template amendment
agreements to enable the most efficient repapering
mechanism possible. In all but the smallest of
legacy back books, efficiency will demand the
use of artificial intelligence, documentation
automation and other and other legal tech
products such as the Hogan Lovells LIBOR tool.
It will not be possible to transition all legacy
products. This is most likely to be the case for
older, widely distributed syndicated loans which
require unanimous lender consent to amend
and in the case of certain bonds where a consent
solicitation process is just not feasible. Firms are
in the process of collating details of their impacted
legacy contracts during the ongoing due diligence
phase of their transition projects.
There is still a significant number of legacy
LIBOR-referencing FRNs, capital securities and
securitizations that are due to mature after the
end of 2021, with many containing either no
fallbacks at all or inadequate fallbacks which
will need to be transitioned. The £RFRWG’s
October paper on Active Transition of GBP
LIBOR-Referencing Bonds sets out practical
considerations in relation to consent solicitations
and a recent International Capital Markets
Services Association (ICMSA) bulletin contains
a useful timeline of a consent solicitation.
The FSB roadmap mentions the need for parties
to take into account the scope and impact of any
steps taken by authorities to support tough
legacy contracts.
The UK government has incorporated this type
of legislation in its recent Financial Services Bill
published on 23 October 2020. The application of
the legislation is not limited to contracts governed
by the law of a member country of the UK,
although the FCA may also consider international
aspects before exercising its new powers.
If it becomes law in its present form, in
summary, in order to assist tough legacy contracts,
the legislation will give to the FCA new powers to
(as its supervisor):
•
direct the administrator of LIBOR to change
the methodology of LIBOR (and previous
statements would indicate that this is likely
to be made up of a forward-looking RFR
plus the ISDA type credit spread adjustment,
although this is not confirmed at this stage); and
•
extend the period of publication of that rate for
a set time (of up to 10 years).
The UK government has said:
“The active transition of legacy contracts
remains of key importance and provides the
best route to certainty for parties to contracts
referencing LIBOR. Parties who rely on regulatory
action, enabled by the legislation the Government
plans to bring forward, will not have control
over the economic terms of that action.
Moreover, regulatory action may not be able
to address all issues or be practicable in all
circumstances, for example where a methodology
change is not feasible, or would not protect
consumers or market integrity”.
Use of this “synthetic” LIBOR by UK regulated
entities will be prohibited except in the case of those
specific tough legacy type exemptions prescribed
by the FCA. The meaning of tough legacy contracts
is not defined in the legislation, but the related
policy statement confirms that the government
and the FCA consider tough legacy contracts to be
those which “genuinely have no realistic ability
to be renegotiated or amended to transition to an
alternative Benchmark”. Further information as to
what will be included in the definition of tough legacy
contracts will be provided when the FCA issues its
expected policy statements. What those exemptions
should be is likely to be the subject of hot debate.
