United States: The End Of LIBOR

Last Updated: June 12 2019
Article by Gregory Harrington and Arturo Caraballo

As alerted in our previous Advisories, LIBOR, the "world's most important number," is being phased out. Created almost 50 years ago on August 15, 1969—opening day of the Woodstock music festival—LIBOR began as a floating, market-determined interest rate for syndicated loans, but over time has become the benchmark interest rate for an estimated $350 trillion in outstanding financial arrangements around the world. These contracts include public and private loans and bonds; consumer financial products such as credit cards, mortgages and student loans, and some $200 trillion in interest rate derivatives.

Due in large part to concern that the determination of LIBOR (formally known as ICE LIBOR) is based on fewer and fewer interbank transactions, and therefore is an increasingly unreliable benchmark for the global financial markets, regulators worldwide have been working to develop alternative benchmarks. Over the past few years, the US Federal Reserve, the UK's Financial Conduct Authority (FCA) and other regulators have convened industry-led working groups to develop risk-free rates (RFRs) as an alternative to LIBOR, with the goal of replacing LIBOR by the end of 2021.

In the US, the Alternative Reference Rates Committee (ARRC)—a private industry group convened by the Federal Reserve Board and the New York Federal Reserve Bank to plan the market's transition away from US dollar LIBOR—has selected SOFR (the Secured Overnight Financing Rate) as the new interest rate benchmark for US dollar-denominated transactions in bond and loan markets. In the UK, SONIA (the Sterling Overnight Index Average) has been chosen as the new interest rate benchmark for pound sterling transactions. Other financial markets, including for transactions denominated in euro, Swiss franc and Japanese yen, have developed their own risk free rates (EONIA, SARON and TONAR, respectively).

Differences between LIBOR and SOFR

The transition away from LIBOR by 2021 presents a series of significant challenges to the financial markets, for numerous reasons. Many of the challenges stem from the basic differences between LIBOR and the proposed replacement rates, for example SOFR.

First, LIBOR is an inter-bank, unsecured lending rate, whereas SOFR is based on overnight transactions secured by US Treasury securities, a rate considered "risk free." As a result, LIBOR is generally higher than SOFR, often by 20 basis points or more, which difference often widens at times of stress in the credit markets. Therefore a simple switch from LIBOR to SOFR, without more, would mean a lower interest rate, so in an existing transaction a transition from LIBOR to SOFR would require an upward adjustment—referred to as a "replacement benchmark spread"— to ensure that the pre- and post-amendment rate levels are compatible. The negotiation between creditors and borrowers of the amount of the replacement benchmark spread may present a challenge, because SOFR—which is tied to the securities repurchase (repo) market—is at times subject to significant volatility, particularly at month-, quarter- and year-ends. In the US, the ARRC is expected to recommend a specific methodology for determining the replacement benchmark spread, but when amending existing contracts creditors and borrowers will be under no obligation to accept it.

Second, while LIBOR is available for various tenors (e.g, one-month, three-month, six-month, etc.), SOFR is currently only available as an overnight rate on the website of the SOFR benchmark administrator (the Federal Reserve Bank of New York). For now, the lack of forward-looking term SOFR makes corporate treasurers reluctant to agree to use SOFR in their loan agreements, as they cannot predict how the new benchmark will perform. While private parties are developing forward SOFR curves for different periods (the CME Group, for example, currently publishes one-month and three-month SOFR futures), it will take time for curves to be developed and then gain widespread market adoption.

Finally, given the absence (so far) of a published forward-looking term SOFR, other methods of calculating SOFR are under consideration, each with its own challenges. For example, should SOFR be accrued from the beginning of an interest period on a daily (overnight) basis, with the final interest rate for the period only determined at the end of each interest period? Or should SOFR instead be determined for a given interest period by compounding daily SOFR for the previous one-, three-, or six-month period? While the first option would better reflect market interest rates during the interest period, neither the creditor nor the borrower would have predictability in terms of future interest income/expense. Many corporate treasurers would be informed immediately preceding the payment date how much interest would need to be paid, raising operational back- and middle-office issues both for creditors and borrowers; a problem compounded for those non-US borrowers required to close a foreign exchange transaction in advance to effect US dollar payments.

Amending Existing Contracts

Perhaps the greatest challenge to the transition from LIBOR to SOFR will be to amend the contractual terms of existing financings that are due to mature after the LIBOR transition date. An estimated $35 trillion of currently outstanding LIBOR-linked financial transactions expire after 2021 (in comparison, the US national debt is $22 trillion). The problem is particularly acute if, prior to the parties successfully amending the contracts, LIBOR itself is no longer published or is otherwise no longer considered a reliable measure of inter-bank lending rates. Concern has been raised about so-called "Zombie LIBOR," where LIBOR remains in legacy contracts after the point when it is no longer supported or reported.

Loan documents for LIBOR-based loans generally provide a definition of LIBOR, with that definition providing certain "fallbacks" in case LIBOR is no longer determinable based on the method provided in the document (generally a designated display page on a Reuters or Bloomberg rate screen). However, these fallbacks are—particularly for many older agreements—generally triggered only when LIBOR is unavailable (for example, if for some reason LIBOR is not displayed on the designated rate screen on the interest rate determination date), but do not consider a scenario where LIBOR no longer exists. Loan agreements also typically contain provisions that apply an alternate base rate in the event that either (a) LIBOR cannot be determined, (b) dollar deposits are not being offered in the London interbank market or (c) LIBOR no longer reflects the lender's cost of funding a loan. Those alternate base rates are often based on the Prime Rate, the Fed Funds rate (plus a margin) or some other agreed upon rate, but these alternate rates were added as a short term solution for a temporary disruption, not as long-term replacements for LIBOR, in particular as those rates are often significantly more expensive than LIBOR.

More recent LIBOR definitions will generally provide a different fallback, already contemplating a time when LIBOR no longer exists, and industry groups have been working to develop a consistent approach. In 2018, the ARRC released market consultations on potential fallback language for syndicated loans, floating rate notes, bilateral loans and securitizations. In April 2019, the ARRC published its recommendations of fallback language for syndicated loans and floating rate notes, based on feedback it received from market participants. Even so, while at least one major bank has adopted the ARRC recommendations in whole, fallback language is still being developed and it will be difficult for the market to develop adequate language until the uncertainties surrounding SOFR are resolved.

Loan modification itself will be a challenge, even after market-standard fallback language has become more fully developed. Loan modification negotiations for bilateral loans between lenders and sophisticated borrowers should be relatively straightforward, though any discussion of a benchmark spread adjustment may be a challenge, especially if negotiated at a time of market stress, when LIBOR and SOFR diverge more significantly. Syndicated loans, the documentation of which often require the approval of lenders holding 100% of the outstanding loan for any proposed modification of the method for calculating interest, will be a greater challenge, particularly if there are numerous members of the lending syndicate with different levels of sophistication regarding the market shift from LIBOR to SOFR. In addition to the obvious LIBOR provisions, amendments may also need to be made to provisions regarding break-funding, make-whole and increased costs, among other clauses. The coordination role of administrative agents will be critical.

But the greatest challenge will likely be to modify floating rate notes (FRNs) that have been widely distributed, as generally the approval of noteholders holding 100% of the outstanding notes is required to amend existing terms and conditions affecting interest rates. To the extent a LIBOR-based FRN is held by a significant number of retail investors, and the terms of the FRN require 100% approval for amendments and have an old-style LIBOR definition, then liability management exercises (such as debt-for-debt exchange offers) should be considered to help mitigate the risk, if at least in part.

New Loan Agreements, Prior to LIBOR Cessation

For new loan agreements being entered into now and using LIBOR as the interest rate benchmark, the ARRC has proposed two different approaches for making future amendments when LIBOR ceases: the "amendment" approach and the "hardwired" approach. Each of these approaches has slight variations when applied to syndicated loans as opposed to bilateral loans. Generally, the "amendment" approach provides that, upon the occurrence of a defined LIBOR replacement trigger (certain cessation or pre-cessation events), the lender (in the case of a bilateral loan) or the borrower and the administrative agent (in the case of a syndicated loan) will have agreed to amend the loan agreement to replace LIBOR with an alternate benchmark rate (which may include term SOFR) unless the other party or parties to the loan agreement (for example, a certain percentage of "required lenders") object in writing within a specified timeframe. Under the "hardwired" approach, upon the occurrence of a defined LIBOR replacement trigger, LIBOR is automatically replaced with term SOFR, compounded SOFR or another alternate benchmark rate determined in accordance with the terms of the loan agreement using an agreed "waterfall." Each of these approaches has advantages and disadvantages.

Generally speaking, the "amendment" approach provides the parties with greater flexibility in establishing a rate to replace LIBOR upon the occurrence of a LIBOR replacement trigger. However, a disadvantage to the "amendment" approach is that the parties may not be able to agree on a replacement rate when LIBOR replacement is triggered and, in that case, the existing (and inadequate) fallbacks will remain in the loan agreement. Depending on the specific wording of these fallbacks and the then-current market, the result will either be inadequate, unduly expensive or unworkable (particularly for loans having longer tenors), and will inevitably in some cases lead to litigation.

At the same time, while the "hardwired" approach has the advantage of not depending upon the parties reaching agreement to a replacement rate in the future at the time a LIBOR replacement trigger occurs, the parties do risk agreeing in advance to a replacement rate (e.g., term SOFR or compounded SOFR) that does not currently exist and may never fully develop. The ARRC's "hardwired" approach includes a required benchmark spread adjustment based on spread adjustments (or adjustment methodologies) published by relevant governmental bodies or ISDA. While the "amendment" approach contemplates that the parties will select a benchmark spread adjustment at the time of the amendment, the parties would still need to agree on the amount (or the methodology for determining the amount) of the adjustment, though giving "due consideration" to certain defined factors. Given that LIBOR is generally higher than SOFR, these spread adjustment provisions are important. Without such provisions, borrowers and the lenders will have different incentives in determining whether a LIBOR replacement was actually triggered, with borrowers likely preferring an early switch to SOFR and lenders preferring a later switch (all other things being equal). For this reason, the ARRC spent considerable effort to develop objective and knowable triggers as part of its consultations.

Our recent experience suggests that parties are more comfortable with the amendment approach than with the hardwired approach until more information regarding replacement rates becomes available.

Other Considerations

The migration away from LIBOR presents other risks to both creditors and borrowers.

Hedging. ISDA is undertaking separate consultations for the derivatives markets, and consulted with the market in July 2018, announcing final recommendations at the end of 2018. While ISDA undertook its consultations before the ARRC took its own, there is concern that the ISDA fallbacks and ARRC fallbacks may not align, generating worries of fallback misalignment between loans / notes and their respective interest rate hedges. For example, unlike the ARRC proposal which includes a pre-cessation trigger (e.g., a public statement by the regulator for the administrator of LIBOR that LIBOR is no longer representative), the current ISDA proposal does not include pre-cessation triggers. Accordingly, loan agreements that include the ARRC's pre-cessation trigger may result in the replacement of LIBOR before it has ceased to be published, while any associated hedges using ISDA's fallback language would continue to be based on LIBOR until it is officially discontinued. Another example of potential divergence between the LIBOR replacement proposals applicable to the cash (loan) and derivatives markets relates to the method of determining replacement benchmark itself. ISDA has announced that it will utilize a compounded replacement rate calculated in arrears as its fallback for derivatives. To the extent the loan market adopts a forward-looking term SOFR (or some other methodology for determining the replacement benchmark) instead of a compounded SOFR in arrears, there will be a mismatch between loans and their associated hedges.

Regulation. For financial institutions in particular, there is increased regulatory focus on ensuring that banks are prepared. The FSB (Financial Stability Board) and IOSCO (the International Organisation of Securities Commissions) have been coordinating international efforts for interest rate benchmark reform. In recent months, the US's Federal Deposit Insurance Corporation (FDIC) focused its Winter 2018 issue of Supervisory Insights to the end of LIBOR, while the US Securities and Exchange Commission (SEC) has identified it as a disclosure and operational concern for both reporting companies and securities industry participants.

Taxation. In the US, a number of issues have been raised about the tax impacts of converting existing loans and other financial instruments from LIBOR to a replacement rate. For example, there is concern that the conversion could result in a determination that there was a material modification of the indebtedness, potentially resulting in a taxable exchange. A similar concern is raised under FATCA, where a material modification to an existing financial instrument can cause the issue to be deemed a new issuance, jeopardizing the "grandfathering" exemption from FATCA withholding for instruments issued before July 1, 2014. This would be a particular concern in the context of an older, existing securitization, where the documentation establishing the issue likely contains no provisions contemplating FATCA withholding. On April 8, 2019, the ARRC sent a letter to the US Treasury and the US Internal Revenue Service requesting formal guidance on these and similar US tax issues.

Potential for Disputes. For many of the reasons discussed above, there may be instances where it will be a challenge to incorporate fallback provisions into an existing financial instrument prior to the cessation of LIBOR because of the inability to obtain requisite consent from the relevant constituents. Absent a statutory or other "fix" that applies across the different market segments, the potential for disputes in these cases is a real concern that should be considered as firms analyze their needs and objectives.


Both creditors and borrowers should already be preparing for the transition from LIBOR to SOFR. We would recommend the following:

First, parties should take stock of their LIBOR exposure under existing loans, notes and derivatives, focusing on transactions maturing after 2021. The definition of LIBOR should be reviewed, as well as the provisions for amending the terms and conditions of the regarding modification. Discussions with counterparties should begin as soon as possible to ensure that counterparties are also aware of the conversion from LIBOR to SOFR.

Second, parties should review standard documents that are likely to be used for future transactions, such as under medium term note (MTN), commercial paper (CP) or certificate of deposit (CD) programs, to check whether amendments should be made in contemplation of future issues. For example, consideration should be given to changing existing program documentation to permit less than 100% approval for amending LIBOR-related interest rate provisions, reducing the ability of small groups of holdout creditors to block necessary amendments. Parties should monitor developments in standard LIBOR replacement language and the developments involving potential term SOFR and "replacement benchmark spread." In addition, given the concern that both SOFR and LIBOR fallbacks may develop in different directions between standard lending/securities documentation and standard ISDA documentation, companies should review credit and hedging documents carefully to avoid potentially costly gaps.

Third, parties, particularly lenders and agents, should review their internal systems to understand what adjustments may be required for loan accrual in SOFR, whichever SOFR calculation method is ultimately used by the market. Back- and middle-office systems and procedures, such as client invoicing, will also need to be adapted.

Finally, parties, again, particularly lenders and agents, should already begin advising borrowers and issuers that LIBOR is coming to an end, preparing them for the changes to come. Less sophisticated counterparties may need additional time to educate themselves on the upcoming changes to LIBOR and the adoption of SOFR.

Final Thoughts

While 2021 may still seem well in the future, the adjustments that market participants will need to make are significant, and these adjustments will be undertaken while replacement rates and fallback provisions remain unresolved. The time to take stock of your company's exposures, and to map a path forward, is now. One of the last bands to perform at Woodstock was Blood, Sweat and Tears. If the issues raised by the transition to risk-free rates remain unresolved by the end of 2021, LIBOR may well end on a similar note.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions