LIBOR Transition Update – Benchmark Transition Event

For any party to a financial instrument grounded by LIBOR, the fast-approaching transition to an alternative benchmark rate raises several important considerations.  While some contracts contain provisions that will make the transition relatively straightforward (such as the provision highlighted in this guidance), others may require negotiated amendment to ensure continuity with parties’ original contract objectives.  A recent announcement by LIBOR’s administrator (which constituted a so-called “Benchmark Transition Event” in many financial contracts adopting an industry-standard “fallback” provision) is a first step to LIBOR’s eventual transition, and this guidance discusses the implications of the occurrence of such announcement.

Example

“Benchmark Transition Event” means the occurrence of one or more of the following events with respect to the then-current Benchmark: (1) a public statement or publication of information by or on behalf of the administrator of such Benchmark (or the published component used in the calculation thereof) announcing that such administrator has ceased or will cease to provide all Available Tenors of such Benchmark (or such component thereof), permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide any Available Tenor of such Benchmark (or such component thereof); (2) a public statement or publication of information by the regulatory supervisor for the administrator of such Benchmark (or the published component used in the calculation thereof), the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, an insolvency official with jurisdiction over the administrator for such Benchmark (or such component), a resolution authority with jurisdiction over the administrator for such Benchmark (or such component) or a court or an entity with similar insolvency or resolution authority over the administrator for such Benchmark (or such component), which states that the administrator of such Benchmark (or such component) has ceased or will cease to provide all Available Tenors of such Benchmark (or such component thereof) permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide any Available Tenor of such Benchmark (or such component thereof); or (3) a public statement or publication of information by the regulatory supervisor for the administrator of such Benchmark (or the published component used in the calculation thereof) announcing that all Available Tenors of such Benchmark (or such component thereof) are no longer representative. For the avoidance of doubt, a “Benchmark Transition Event” will be deemed to have occurred with respect to any Benchmark if a public statement or publication of information set forth above has occurred with respect to each then-current Available Tenor of such Benchmark (or the published component used in the calculation thereof).

What is it?

The cessation of LIBOR has been a hot topic in the financial services industry in the past couple of years, and there has been some speculation among the industry participants that perhaps LIBOR will remain available for longer than expected, especially given the disruption caused by the coronavirus global pandemic.  While the timing of LIBOR’s eventual demise has now been revised, in that certain tenors of LIBOR will in fact still be published beyond 2021 (potentially until June 2023), it is now a virtual certainty that LIBOR will transition.

The first step to such transition is the occurrence of a so-called “Benchmark Transition Event” which is a concept included in the standard “fallback” language drafted and promoted by the Alternative Reference Rates Committee (ARRC).  On March 5, 2021, the ICE Benchmarks Administration (IBA) (which administers LIBOR) announced its intention to cease the publication of:

(i) all GBP, EUR, CHF and JPY LIBOR settings, and the 1 Week and 2 Month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021; and

(ii) the Overnight and 1, 3, 6 and12 Month USD LIBOR settings immediately following the LIBOR publication on June 30, 2023.

The ARRC have now publicly confirmed that such announcement by the IBA constitutes a “Benchmark Transition Event” under its various fallback language.

What does it do?

The mere occurrence of a Benchmark Transition Event in and of itself does not necessarily trigger significant obligations on any party, other than, in the case of a syndicated loan facility incorporating an ARRC-recommended fallback provision, a notice requirement by the facility agent.  In fact, because market participants have not adopted a uniform fallback approach (some have followed the ARRC’s language others have used their “house” language and still others have adopted negotiated hybrid language), different implications (if at all) ensue under different loan agreements.

However, the public and definitive nature of this announcement is significant in the long march toward LIBOR’s transition, and market participants are expected to accelerate their efforts in moving away from LIBOR and getting ready to adopt the Secured Overnight Financing Rate (SOFR), the ARRC-recommended successor to USD LIBOR.

How is it relevant to shipping?

The vast majority of ship finance loans calculate interest based on LIBOR, and often bareboat charters tied to sale leaseback transactions have a component with reference to LIBOR in computing the charter rate.  Going forward, new financial contracts will likely be SOFR-based, as financial institutions are strongly encouraged to move away from LIBOR on new contracts, and those legacy contracts that mature beyond June 2023 will need to be amended to incorporate SOFR.  Some contracts may provide for specific landmarks, including fixed outside dates, for transitioning away from LIBOR, and financial institutions may be reaching out to their borrowers to discuss an amendment to their facility documents (as well as certain collateral documents to the extent required under applicable law).

What steps should Lenders and Borrowers take?

Borrowers and lenders are urged to tune in to the latest updates and developments on LIBOR’s transition progress.  Seward & Kissel has established a LIBOR Transition Task Force and our attorneys are actively advising clients on the implications of LIBOR’s transition. Current clients are invited to reach out to the Seward & Kissel attorney they primarily engage with to discuss the implications on existing financial documentation, subscribe to ongoing LIBOR transition updates, and receive access to a comprehensive IBOR portal.  After a year marked by reduced activity among the global health crisis, LIBOR’s transition will accelerate and may soon result in meaningful changes in financial documentation terms.