UK banks starting to adopt US recommendations on contractual fallbacks for loans in the event of Libor’s demise

A growing number of UK banks are choosing to follow US recommendations on how to structure contractual fallbacks for loans from a group of lenders in the event Libor is scrapped, a senior Fieldfisher lawyer said.

A US Federal Reserve-sponsored panel has recommended a “hardwired” approach for the American market that locks in specific fallback rates for the recommended Libor alternative once the benchmark’s disappearance is triggered.

Richard Gibbard of London-based law firm Fieldfisher addressed incipient trends in the UK market at a virtual session yesterday.

“There are definitely trends developing in a more hardwired or a more organized switchover than perhaps the consultative type arrangement, which is what we were seeing earlier in the markets,” said Gibbard, who sits on a number of industry associations.

Under the “consultative” or “amendment” approach common in both the UK and US, parties to group or syndicated loans such as collateralized loan obligations defer writing a specific rate into the contract.

Instead, they agree to negotiate a rate once the end of Libor is triggered by the UK’s Financial Conduct Authority or by the market.

The official US Libor alternative is the market-based Secured Overnight Financing Rate. UK’s recommended substitute is the market-based Sterling Overnight Index Average.

— ARRC recommendations —

Recommendations of the Fed-sponsored Alternative Reference Rates Committee, while nonbinding, carry considerable weight among American financial institutions.

The private sector panel, which is overseeing the US transition from Libor, recommended in June a hardwired approach to syndicated loans.

“Hardwired fallback language offers certainty as to what the successor rate and adjustment will be and, in many cases, obviates the need for seeking consent for an amendment,” it said.

“It may simply not be feasible,” the committee added, “to use the 'amendment approach’ if thousands of loans must be amended in a short period due to LIBOR cessation.”

In addition, an amendment approach is likely to favor either borrowers or lenders, depending on the market cycle in which the fallback rates are negotiated, the panel said.