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US$ LIBOR – Some breathing space2 December 2020

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Lenders and borrowers should be somewhat relieved to hear that US Dollar LIBOR (USD LIBOR) has had a bit of a reprieve. As we reported in our previous article, ICE Benchmark Association Limited (IBA), the Financial Conduct Authority (FCA), other official sector bodies and the panel banks have been discussing the future of USD LIBOR with a view to it continuing beyond 31 December 2021.

"As the majority of ship finance deals use one or three month USD LIBOR, this should mean that in many cases there need no longer be such a scramble to complete the documentation remediation exercise discussed in our previous article by the end of 2021."

This week, concurrent announcements by IBA, the FCA and US regulators, have set out the agreed proposals for the transition away from USD LIBOR. Although some LIBOR tenors (namely one week and two months) are likely to cease to be published immediately following 31 December 2021, the proposed end date for the remaining tenors is now 30 June 2023. Although this remains subject to continued consultation, as the announcements note, this supports a smooth transition for legacy contracts by allowing time for more existing deals to mature before USD LIBOR is proposed to cease. As the majority of ship finance deals use one or three month USD LIBOR, this should mean that in many cases there need no longer be such a scramble to complete the documentation remediation exercise discussed in our previous article by the end of 2021. Given the frequency with which facilities are amended or refinanced, once an agreed methodology is established for SOFR facilities, the parties will, in many cases, be able to move from LIBOR as part of the agreed changes rather than as a separate exercise.

In the context of the ship mortgage issue and the requirements of certain major flag state laws for describing the method of determining the rate of interest (see the link to our previous article above) the extra time is welcome, especially as regards what might need to be done in relation to existing mortgages. It also allows more time to work on possible ways of avoiding the need for registration of mortgage supplements (for some flags at least) if not for existing deals then for new deals.

Both lenders and borrowers do still need to focus on LIBOR replacement. The announcements include supervisory guidance encouraging banks to stop new facilities being made available based on USD LIBOR by the end of 2021 with the FCA stating that they will be consulting on this in Q2 2021. Given that other LIBOR currencies, including sterling, have not been similarly reprieved, it is expected that a market-wide agreed methodology for risk free rate-based interest calculation will be established sooner rather than later next year.

In the meantime, it remains important to include in current agreements one of the available alternative options to address LIBOR transition. However, given the current proposals and the continued uncertainties about the different methodologies for interest calculations based on SOFR, we might see some pause in a movement towards hardwired switches for USD deals. We also expect to see the trend to include the latest LMA suggested wording for negotiations on a replacement benchmark to commence relatively early in 2021 will slow up or alternatively much later dates will be selected for the start of negotiations.

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