What is affected?

All transactions that directly or indirectly reference LIBOR. This pending transition is of crucial importance for:

• loans
• bonds
• swaps

There are a number of industry-lead initiatives that propose a response to address this change. This includes the International Swaps and Derivatives Association's (ISDA's) publication of amending supplements and protocols.

(note: Bank Bill Swap Rate (BBSW) is not directly affected)

More than just a finance issue

The breadth and scope of this change cannot be underestimated. LIBOR rates underlie a broad range of key provisions in a wide range of commercial transactions, including:

• discount calculations
• internal rate of return (IRR) calculations
• default interest
• forward sale agreements
• premiums
• investment benchmark assessment calculations
• option pricing
• lease payments and rent reviews
• other financial formulae

What to do with new transactions

Formulae will need to be updated to reflect the new reference rates. This will involve more than a simple definitional change, as the legacy rates and the new rates are based on different criteria for key items including tenor and risk profile.

What to do with existing or legacy transactions

Existing and legacy transactions will need to be amended, or there is the risk of either being void for uncertainty, or leading to unintended commercial results.

Industry standard documentation will likely provide some guidance, but is unlikely to be a "one size fits all" approach. Care is needed to ensure an appropriate position is reached.

Timelines need to be developed to reflect the December 2021 end date, and the number of parties involved (that is, multi-party transactions with documented consent processes such as bond issues) need to be factored in.

Other identified issues

Internal system issues – such as booking of positions and internal reporting protocols, will need to be adapted.

Next steps:

Commercial and finance contracts should be reviewed to assess the extent of the issue on primary documentation. This will require a due diligence review of a broad suite of commercial transactions – which will have timing and resourcing implications.

An engagement plan will need to be developed with counterparties.

Please contact us for further information or to find out how this will affect you.