Transition from LIBOR in the loan market - LMA Webinar Update May 2020 Kam Mahil and Keith Taylor - LMA - WorkCast
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Transition from LIBOR in the loan market – LMA Webinar Update May 2020 Kam Mahil and Keith Taylor - LMA
Agenda – Where are we now? • Update on Timelines – Update on ‘loan market’ transition issues • Risk-free Rate (“RFR”) Term Rates • RFR Compounded in Arrears Conventions • Credit Spread Adjustment • Loan Documentation – What should lenders be doing? • Expectations over next few months • Practical Steps • Key Messages
Context - Covid-19 impacting current operating environment
Widespread recognition external operating environment is very challenging; transition from
LIBOR must be viewed in context
Priority is flow of credit/liquidity to economies and minimising disruption of front-line
contact between banks and borrowers (new Loan Schemes)
Many borrowers have very pressing threats & challenges and significantly less
time/resource to engage with LIBOR transition
Covid-19 Focus therefore very much on what can be progressed within banks’ control and/or
Impact through working groups (e.g. clarifying conventions, systems build/development)
Those aspects relying on client interaction (borrower engagement & education) may
3
inevitably need to take a back seat for the moment
HOWEVER, despite the current environment, Transition from LIBOR continuesWhere are we now on Transitioning from LIBOR?
Where are we now?
The FCA, Sterling RFR Working Group, ARRC and Euro Working Group have all
made announcements around timelines for the transition to RFRs
Despite the current market disruption being caused by Covid-19, the FCA has stated that
the publication of LIBOR is still expected to be discontinued at the end of 2021
The Sterling Working Group has, however, moved the target of no new £LIBOR issuance
from end Q3 2020 to end Q1 2021. Note that other milestones need to be met by Q3 2020
Updates to The ARRC published its 2020 objectives, including establishing final recommendations for
timelines business loan conventions by 31 July 2020
The Euro Working Group has delayed upcoming deliverables due to Covid-19, including 5
recommendations on EURIBOR fallbacks to end Q4 2020 / Q1 2021 instead of this summer
Forward-looking Term Rates are still not yet available and the timing for Sterling term rates
will be pushed back due to Covid-19Important milestones through to end-2021
Development & Target of no Post-2021
Conventions for Final
implementation of new £LIBOR publication
alternatives to recommendations
operational capability issuance by end of LIBOR no
LIBOR including on EURIBOR
for RFR loans (e.g. Q1 2021; longer
compounded in fallback measures
loan systems) & potential SONIA guaranteed
arrears increasing borrower term rates
awareness EONIA
discontinued
Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
ARRC Offer of non- RfP processes for Potential
refresh of LIBOR products administrators for SOFR
hardwired and contractual term rate and term rate
fallback arrangements in spread adjustment;
language new LIBOR loans use cases for
to facilitate SOFR term rate
conversionUpdate on Loan Market Transition Issues
Use of RFRs – issues in the loan market
Conventions for
Forward-looking Term
alternative RFR Rates
Rates not likely to be
such as Compounded
available until late in
in Arrears under active
the transition process
discussion
Solving for Multi-Currency
facilities requires global
co-operation
Spread adjustment to
Documentation for new
reflect differences
RFR facilities and
between Credit Term
transitioning legacy
Rates and RFR
LIBOR facilities
versions under
developing in parallel Systems Implementation
discussion
• Bank systems
• Treasury managementUpdate on forward-looking term rates based on RFRs
Forward-looking RFR Term Rates still not expected in the short/medium term
As a reminder, not all jurisdictions are progressing forward-looking RFR Term Rates (e.g.
CHF); Note: Euribor will continue as a Credit Term Rate for the moment
Forward-looking SONIA term rates now expected Q4 2020 / Q1 2021, although beta rates
expected over the next months. However, use cases are limited
Where are The ARRC expects to progress forward-looking SOFR term rates in Q3 2020, with
we now publication in H1 2021. It will be considering use cases for such term rates
The Euro Working Group is progressing forward-looking term rates, although the timeline
is uncertain. It is also considering use cases 9
CONCLUSION – planning assumptions should still not be built around forward-looking
RFR Term Rates as a base caseConventions for Compounded RFR in Arrears
Progress has been made in narrowing down outstanding issues for loan conventions for
Compounded RFR in Arrears facilities
Syndicated facilities have been completed in the market (e.g. Shell, BAT), establishing
precedents, involving many banks and working through compounded RFR issues
Important compounding conventions widely accepted – daily interest accrual, compounded
RFR not margin, pro rata interest distribution, business day conventions…
Update
Some newer elements include the potential use of a daily compounded RFR index in loan
market (now available in USD & CHF and consultation in GBP now closed)
Substantial body of work on conventions including RFR WG draft conventions paper,
ARRC BLWG paper on observation shifts, worked examples 10
Exercises underway from working groups on key conventions issues including an RFR WG
loan conventions survey and ARRC BLWG feedback on choice of observation shiftCompounded RFR Conventions – some remaining issues
Choice of Use of
Options of
Observation Compounded
RFR Floor(s)
Shift Index
Calculation/ Loan trading
Loan trading
rounding for – delayed
– cost of carry
daily interest compensationEngagement with system providers is critical
Conventions for
Forward-looking Term
Compounded in
Rates
Arrears
Solving for Multi-Currency
facilities requires global
co-operation
Credit Spread
Documentation
adjustment
Systems Implementation
• Bank systems
• Treasury managementApproach to credit adjustment spread
To reflect differences between RFRs and LIBOR, an appropriate credit adjustment spread
is needed when transitioning agreements from LIBOR to RFRs – ideally determined by a
transparent & market-accepted methodology
Cessation and pre-cessation fallbacks Early opt-in triggers and active transition
ISDA consultations settled on historic median These were not covered by the Sterling
approach with a 5 year lookback Working Group consultation
Sterling RFR Working Group consultation on Linear interpolation approach seen in sterling
cash markets in favour of ISDA approach FRN consent solicitations and loan
amendments
ARRC recommendation for ISDA approach in
cash products In the Shell and BAT deals, which involve an
Euro Working Group expected to consult later in-built switch to RFRs, a set figure is
this year specified for the spreadDocumentation being developed
The LMA exposure draft facility agreements were published in September 2019 and we
have seen use of these in transactions. The LMA is working on expanding the suite of RFR
documentation to help the market…
LMA February 2020 note on outstanding requirements for the production of LMA
recommended forms
The exposure drafts are single currency facility agreements; the LMA is working on a
multicurrency RFR facility agreement
Expansion
of RFR LMA LIBOR Working Party discussions around fallbacks
document
suite
Shell and BAT transactions opted for switch mechanisms to move from LIBOR to RFRs
at a specified trigger date 14
The LMA is working on a facility agreement with an in-built switch mechanism from
LIBOR to RFRsWhat should Loan Market Participants be doing?
Action still required – focus is on what banks can control
Loan Ops /
Conventions Existing
Infrastructure
for RFR LBOR loan
Facilities exposure
LIBOR Transition
Working Groups
Communication / Education
Clients Internal MarketPractical steps – Understand conventions (across currencies) • Test understanding of issues/market discussion • Feed into consultations/engage with working groups & LMA – Systems capability to offer RFR loans • Loans systems providers developing RFR capability – Operational readiness? • Wider understanding of managing RFR facilities within your firm • Capability/implications of being facility agent? – Completion of new RFR facilities • Pilot/test facilities – working through issues • Tracking of RFR-referencing facilities • There are borrowers willing to be engaged
Key Messages
Key messages – Work on transition continues – 2021 remains a hard deadline for LIBOR transition • Regulators remain focused on transition • RFR facilities are being completed; needs to be scaled up – Some interim milestones may have shifted and borrower engagement understandably challenged but – Work continues on key aspects of transition • RFR compounding conventions • Operational/systems readiness • Legacy transition/fallbacks • Documentation to support transition – 2020 still a critical year – Continued engagement on transition very much appreciated
LMA here to support LIBOR transition – LMA operating fully remotely – LMA interaction with regulators, national working groups and other trade associations • Sterling, Euro and Swiss RFR working groups • Joint loans group/trade association meetings – Communication • Virtual LIBOR events • Regular LIBOR newsletter • Other publications – LIBOR Microsite – Documentation
Contact details Keith Taylor Kam Mahil keith.taylor@lma.eu.com kam.mahil@lma.eu.com +44 20 7006 2691 +44 20 7006 6629
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