Losing LIBOR in the Capital Markets — A Reprieve?
Dawn Holicky Pruitt, 10 March 2021
As reported in our previous alert “Losing LIBOR in the Capital Markets — Are You Ready?,” the anticipated date for discontinuation of the London Interbank Offered Rate (LIBOR) is approaching. While LIBOR is a widely used benchmark rate for U.S. dollar-denominated floating-rate debt securities and other financial products, LIBOR was the subject of widespread market manipulation and ineffective regulation. In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (FCA) announced its intention to stop persuading or compelling banks to submit rates for the calculation of LIBOR to its administrator after 2021. This announcement strengthened the objective of the Alternative Reference Rates Committee (ARRC), a committee convened by U.S. regulators to identify LIBOR alternatives in the U.S. market.
While market participants were warned that LIBOR may cease to exist after 2021, the ICE Benchmark Administration Limited (IBA), as the administrator of LIBOR, recently announced the results of a November 2020 consultation regarding the upcoming discontinuation. Although certain lesser-utilized U.S. dollar-denominated LIBOR tenors will cease to be published after December 31, 2021, the IBA announced it will continue publishing widely used tenors (such as one-month LIBOR and three-month LIBOR) until June 30, 2023. The FCA’s support for the extension provides confidence regarding the ongoing representativeness of the continuing U.S. dollar-denominated LIBOR tenors until June 30, 2023.
The extension of widely used U.S. dollar-denominated LIBOR tenors provides issuers of LIBOR-linked debt securities with additional time to prepare for LIBOR discontinuance. In particular, the extension may, in many cases, allow for a natural end to LIBOR-linked debt securities through maturation or the exercise by issuers of redemption rights.
