USD LIBOR, the floating rate benchmark representing the rate at which banks borrow and lend to each other in the Eurodollar markets, will cease being published after June 30, 2023. While a rate, “Synthetic LIBOR,” will still be published by LIBOR’s administrator and will appear on a Reuters Screen, it will not “be representative” of the underlying markets.

For most readers, LIBOR is a thing of the past. Since January 2022, new loans and derivatives were prohibited by regulators from referencing LIBOR. SOFR was widely adopted by the market as the floating rate. For others, loans were remediated over the past year through proactive amendments, which for some was a long and sometimes painful and expensive process with legal fees racking up in the tens of thousands of dollars.

However, many loans have yet to be amended. According to the JPM SOFR transition update, roughly 44% of the loans in the JPM Loan Index were referencing SOFR at the end of May. While it’s likely that many of these loans have been amended and that SOFR will replace LIBOR at the start of the next interest period, other loans simply have not.

Depending on the specific language in the credit agreement, when LIBOR is not ascertainable by the administrative agent or when LIBOR is no longer “representative,” the fallback is typically the Prime Rate, currently 8.25%!

What do I do if my loan has not been amended?

First, call your banker! There is no excuse for a bank not proactively reaching out to amend your loan. They probably have, but perhaps, the amendment fell too far down on your treasury and legal staff’s to-do list or the bank’s internal process for remediating loans was inefficient. Get a plan.

Second, check your LIBOR roll-over dates. You may avoid the Prime rate by rolling over on LIBOR one last time if you haven’t already done so. The LIBOR rate on June 30, 2023, will still be a “good” and valid LIBOR rate. Therefore, if your LIBOR definition refers to setting LIBOR two New York and London business days before the end of the interest period, loans with a July 5, 2023, or earlier reset date can still rely on LIBOR for the safety net. However, if the definition only refers to London business days for resets, then July 4 would be the latest rollover date. For those with the common June 30 period end date, LIBOR resets on June 28, but notice to the administrative agent or lender must typically be given June 27 — tomorrow!

Third, Synthetic LIBOR may offer a safety net at least until September 30, 2024; however, its use will be subject to interpretation based on the specific definition of LIBOR and other provisions in the credit agreement. I don’t believe the application of Synthetic LIBOR is very straightforward given the bespoke nature of definitions in credit agreements, so be sure to check with your banker and legal counsel. Those agreements that incorporated the widely accepted ARRC benchmark replacement language where the trigger is when LIBOR will no longer be “representative,” will not be able to rely on Synthetic LIBOR.

Lastly, the LIBOR Act may apply to loans and derivatives with no fallback provisions (e.g., no fallback to Prime) or fallbacks that rely on a dealer poll. For example, any derivative that was entered into prior to January 25, 2021, and which documentation has not been amended through the ISDA Protocol process, can rely on the LIBOR Act. By law, LIBOR will be replaced with daily compounded SOFR and the ISDA/ARRC credit spread adjustments.

The Last Word

It’s not too late, but time is basically running out. While I don’t expect any market disruptions, I suspect there will be more than a handful of borrowers who are “stuck” in Prime and will be having very unpleasant conversations with their lenders.

For the vast majority though, CONGRATULATIONS for helping to manage through one of the most challenging changes and processes to hit the financial markets in our lifetime.

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