Transition Loanbridging loan
Andrew Bailey, Chief Executive Officer of the UK's UK FCA, made an extensive statement on 27 July 2017 which shocked the UK's finance industry by announcing that the London Interbank Offered Rates ("LIBOR"), the prime benchmark interest rates for ICE Benchmark Administration calculations of at least $350 trillion in worldwide finance deals, will expire in 2021.
Since the end of July, the revolving credit syndication markets have been debating this release and have started to respond with different ways to tackle the problem in credit recordkeeping. As a first step towards solving the problem of the LIBOR disorder, the one chosen by and between Jane Street Group, LLC, as a debtor and JPMorgan Chase Bank, N.A., as a management agency in the most recent Jane Street Credit Agreement of 25 August 2017, is the one that has been adopted.
Jane Street's stance deals with the LIBOR question by allowing the loan contract to be modified to provide a substitute interest charge with the approval of the borrowers and the major creditor. Some creditor groups have criticised the Jane Street stance on the basis that the approval of the vast majority of lenders is not likely to change such a basic notion as price.
Instead, such creditors have argued in favour of maintaining the lender's consensus on all changes to LIBOR and have found that on the basis of the "yank-a-bank" rules, creditors may feel at ease in their lending facility, which would allow them to eliminate all creditors who are against a suggested change to the substitute lending facility. A further more recent option is the use of the loan agreement for operating theater partners of August 31, 2017 by and between Surgery Center Holdings, Inc. and the Surgery Center Group.
and Jefferies Finance LLC as management agents. If the LIBOR is not available on the Reuters Screen LIBOR01 page or any other generally accepted follow-up page, the LIBOR will instead be calculated on the basis of an alternate interest index set by the management agents in agreement with the borrowers.
The creditors have also strongly objected to the surgical partners' approaches as they would allow the management agents (in agreement with the borrower) to determine the LIBOR substitution without the lender's approval. Another alternate line of action worth considering is to ask the borrowers and the vast majority ofthe creditors to bargain in good faith for a LIBOR surcharge.
This could be worded in such a way that if either (i) the Mortgagor informs the Administrator that he is applying for a LIBOR substitution change, or (ii) the Administrator informs the Mortgagor that the vast majority have applied for a LIBOR substitution change, the Administrator, the Mortgagor and the Mortgagors would be obliged to bargain in good faith for such a change in terms of format and content that is sufficiently satisfying for the Mortgagor and the vast majority are.
LIBOR is defined in many loan contracts as meaning that if LIBOR is not available on the Reuters page or a subsequent or replacement page, the management agents may fix the LIBOR on the basis of their own calculation of the interest charges on offer. Furthermore, many loan contracts have an alternate interest rating which provides that if the management agents and/or the necessary creditors establish in good faith that there are insufficient and appropriate means to establish LIBOR, the creditors are authorised to suspend lending to LIBOR and, if initiated, all LIBOR credits are considered to be transformed into basic credits.
The majority of loan contracts also have higher cost and/or changes in the legal requirements, which provide that if it becomes unpractical or unlawful for a creditor to grant LIBOR lending on an ad hoc loan by ad hoc loan, that creditor's commitment to take out or maintain LIBOR lending is waived. As far as the creditor is concerned, the boiler draft rules described in the immediately previous section are not acceptable as long-term remedies, as they would lead to a situation where the creditors would have to take out a key interest charge, which would lead to higher cost for the creditor.
LIBOR's replacement reason and not the LIBOR reform from Andrew Bailey's July 27 address is deserving of repetition: the basic LIBOR measurement target universe - the uncovered bank loans wholesaler loan universe - is "no longer sufficiently active" according to an FCA survey and is unlikely to become significantly more liquidity in the near-term.
Faced with this situation, LIBOR currently works more as a mortgage interest subsidy calculated by a group of specialist banking experts than as an interest subsidy based on a representational number of real operations. FCA has been encouraging the panellists and the panellists have committed to maintain LIBOR for a four to five year timeframe (i.e. until the end of 2021) to allow enough timeframe for a scheduled and ordered transition.
However, after the expiry of this period, the FCA does not envisage forcing the banking institutions to comply with LIBOR. As regards the question of who will be in charge of the formulation of a'substitute rate', the FCA has made it clear that it is up to economic operators to start in the short run with the transition to'alternative fixed transaction benchmarks'.
So far, there is not a Single Alternate Replacement Ratio that has turned out to be an option. Rather, different levels of interest have proved to be possible replacements in different market segments. US AARC, established after the end of the recession, in June 2017 said it would recommend that US LIBOR be replaced by a Broad Treasuries Repo Financing Ratio ("BTFR") calculated on the basis of the costs of call money backed by US government bonds.
AARC has also called BTFR Secured Overdue Funding Rates ('SOFR'). In the UK, the UK Working Group has also chosen the UK Standard Index, SONIA, which is calculated on the basis of the weighting of certain unhedged night business.
Neither BTFR/SOFR nor SONIA are accommodation prices and therefore differ from LIBOR in that they are backward rather than forward-looking. On 27 August 2017, the Federal Reserve filed a LIBOR rate manufacturing information application and plans to gather and table this information with a view to commencing BTFR/SOFR release in the first half of 2018.