Leaving LIBOR: How to draft a credit agreement in the Latin American loan market before LIBOR’s replacement is available

White & Case LLP

With calls to phase out the scandal-ridden LIBOR by the end of 2021 and the potential size of the disruption this will cause, loan market participants should be prepared. Sabrena Silver, partner, and Simon Cassell, associate, of global law firm White & Case, explain.

Regulators, banks and other market participants are grappling with the many challenging questions that transitioning to alternative benchmarks brings about: What will be the consequence of the London Interbank Offered Rate (LIBOR) discontinuation in the context of credit agreements both in the Latin American loan market and in the New York loan market? What will be the proposed replacement benchmark rate? And how will the current trends in loan documentation and in the New York market address this change as they apply to loans in the Latin American market?

What is LIBOR, and why are we leaving it?

LIBOR is the most widely used benchmark for short-term interest rates, including for US-dollar loans in the New York market, and among the most widely used for short-term interest rates in the Latin American market. LIBOR rates are published for US-dollars, British pounds sterling, Euros, Japanese yen, and Swiss francs at seven different maturities ranging from overnight to one year. LIBOR is an indicative average interest rate at which a panel of 11 to 18 banks (chosen by the ICE Benchmark Administration, which has responsibility for administering LIBOR) indicate that they are prepared to lend funds on an unsecured basis to one another in the London money market.

LIBOR underpins an estimated US$350 trillion worth of financial contracts worldwide
Source: Various market estimates, PwC

In 2012, it came to light that certain of the panel banks had been manipulating LIBOR rates by adjusting the rate they reported to the British Banker’s Association (ICE Benchmark Administration’s predecessor) in order to achieve an advantage in their trading positions or to improve the perception of their creditworthiness. Since then, the current method of determining LIBOR, based on indicative quotes, has been widely criticized for being without a basis in actual transactions, and there has been extensive discussion of a replacement benchmark. Unfortunately, basing LIBOR on actual transactions has proven difficult, because there are insufficient transactions at each panel bank for each maturity in each currency on each day. As a result, the LIBOR panel banks are still forced to exercise considerable judgment when submitting their rates.

In a speech on July 27, 2017, Andrew Bailey, chief executive of the Financial Conduct Authority (the UK governmental agency charged with regulating LIBOR), publicly called for LIBOR to be discontinued and replaced by the end of 2021. In particular, he acknowledged the panel banks’ reluctance to continue to quote LIBOR, as banks have become weary of the potential legal risk and liability in quoting LIBOR. The Financial Conduct Authority has persuaded the panel banks to continue their roles through the end of 2021, with the goal of completing a transition from LIBOR to a replacement benchmark rate by that date.

View full image

SOFR: Another fish in the sea?

For US-dollar loans, currently the most-commonly proposed replacement for LIBOR is the SOFR (Secured Overnight Financing Rate), which is published by the New York Federal Reserve and is a measure of the cost of borrowing cash overnight secured by US Treasury securities. SOFR addresses two concerns with LIBOR. One, it is based on actual and abundant transactions, currently approximately US$800 billion in transactions. Two, the rate is provided by the New York Federal Reserve, removing the ability of panel banks to manipulate the rate and obviating the dependence on the willingness of a panel of banks to participate.

Unfortunately, however, SOFR raises challenges as a potential replacement of LIBOR due to two fundamental differences between SOFR and LIBOR. First, SOFR is an overnight rate only. It does not provide an indicative fixed rate for the longer LIBOR maturities. Second, SOFR is a secured rate and does not include the spread related to bank credit risk that is currently built into LIBOR, which is the rate at which banks will lend to each other on an unsecured basis. Given these fundamental differences between SOFR and LIBOR, market participants are concerned that the replacement of LIBOR with SOFR will ultimately cause potentially economically significant changes in the interest rates payable on loans for which LIBOR currently functions as a benchmark rate.

Given the uncertainty surrounding a benchmark rate that will replace LIBOR, there is still no clear market standard for addressing the anticipated disappearance of LIBOR or its replacement in loan documentation

The Alternative Reference Rates Committee ("ARRC", a working group convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York) has set itself the goal of the development of forward-looking term rates based on SOFR derivative markets, but no such rates have been proposed as yet.

Other alternatives have been proposed for different currencies, such as SONIA (Sterling Overnight Index Average) for British pounds sterling, and TONAR (Tokyo Overnight Average Rate) for Japanese yen, and they all have similar concerns.

View full image

A potential suitor hiding in plain sight?

Almost every loan agreement in the New York market—and some, but not all in the Latin American market—provides that a base rate, a daily floating rate that is typically the highest of either the Federal Funds Rate plus a spread, one-month LIBOR plus a spread, and a "prime" rate, would be available in the absence of LIBOR. Unfortunately, the use of a base rate is not an adequate solution because it is usually a higher rate than LIBOR, and a base rate does not allow the borrower to fix the interest rate for a given period of time, as it is a daily floating rate.

In loan agreements that include the base rate option, the base rate could potentially function as a temporary safety valve in the event that LIBOR is discontinued, providing a well-established and orderly mechanism for determining the interest rate at least on a temporary basis while the borrower, the administrative agent and the lenders negotiate a LIBOR alternative.

Unfortunately, due to a difference in market practice from the broader New York loan market, many LatAm loans do not typically have a "base rate" option, so this safety valve may not be available in those financings. As a result, many LatAm loans may not have a clear mechanism for even a temporary solution in the event that LIBOR is discontinued (rather than just temporarily unavailable). As such, particular attention should be applied to this issue in Latin America.

Loan documentation: Keeping our options open

Given the uncertainty surrounding what benchmark rate will replace LIBOR and the related economics, there has not yet emerged a clear market standard or practice for addressing the anticipated disappearance of LIBOR or its replacement in loan documentation.

Approximate cost incurred by banks in LIBOR-related penalties globally
Source: The Financial Times

Four key documentation trends to be considered in all new loans and in significant amendments to existing loans

Four key documentation trends to be considered in all new loans and in significant amendments to existing loans

1. Who determines that a new rate is necessary and on what basis?

The first element that must be addressed is who determines, and on what basis, that LIBOR should be replaced with a successor rate. According to a survey done by Practical Law Finance, 66 percent of credit agreements specified that the administrative agent determined when a successor rate should be used, with the remaining 34 percent specifying that the administrative agent should make such determination with the borrower and/or the required lenders.

There are a number of formulations for the basis on which such determination should be made, but they usually rely on a combination of some or all of the following triggers:

a. The administrative agent being unable to ascertain LIBOR due to circumstances that are unlikely to be temporary
b. A public statement by a relevant regulatory authority that LIBOR shall no longer be used
c. Syndicated loans are no longer being executed that refer to LIBOR, but instead a new benchmark interest rate is being used

2. Who determines what the new rate should be?

Given the uncertainty surrounding the replacement rate, and the inability at this time to describe the replacement rate, the credit agreement should specify which parties to the agreement should select the new rate once the necessity of the new rate has been determined. The US loan market seems to be settling on the new rate being chosen by the administrative agent and the borrower (occasionally formulated instead as "by the administrative agent with the consent of the borrower").

3. Is lender approval required?

As changing the benchmark rate will affect, and potentially lower, the interest rate paid by the borrower, this kind of amendment would normally require the consent of every affected lender. To avoid the administrative obstacle and ensure that the parties will be able to implement a replacement rate, the approach being taken in most deals is to make clear that an amendment implementing a replacement rate does not require the consent of every affected lender and to provide a negative consent right, where at least a majority or super-majority of lenders must object to the change within a specified period of time to prevent implementation of the replacement rate.

4. Are the lenders’ economics protected?

Some credit agreements also build in protections around loan economics to provide comfort to the lenders that the economics of the loan will not change fundamentally upon LIBOR replacement. Typically this at least includes a floor to the replacement index, and we have also seen in two deals from the first quarter of 2018 a prohibition on the reduction of the margin that is applied on top of the new index benchmark.

However, certain key documentation trends appear frequently, which we discuss below.

On September 24th of this year, ARRC released for public consultation two proposed documentation approaches. The first is an ‘amendment approach’ that lays out a framework for expediting an amendment in response to the replacement of LIBOR. The second is a ‘hardwired approach’ that, upon the replacement of LIBOR, sets up a waterfall of different SOFR-based benchmarks that would be used depending on whether they are available at that time. The ‘amendment approach’ is based on current market practice and broadly addresses the same issues as the key documentation trends that we identify . The ‘hardwired approach’, in contrast, does not seem to have been adopted by the market, but perhaps suggests a potential direction when there is more certainty around the replacement benchmarks.

Bouncing back from the breakup

At this stage, it is not possible to predict the effects of replacing LIBOR as the benchmark rate, or where the market will settle once it happens. But 2021 is fast approaching, and given the potential size of the disruption this will cause, loan market participants should be prepared. Best practice, and the current direction of market standards, is to maintain flexibility in the solution while providing clarity on the process of implementing a replacement. Implementing now clear mechanisms and procedures for who determines when LIBOR must be replaced and on what basis, who determines what the new rate will be, whether lender consent is required and what fundamental protections on economics are included will greatly facilitate an orderly transition to our new benchmark rate partner.

Click here to download PDF.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© White & Case LLP | Attorney Advertising

Written by:

White & Case LLP

White & Case LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.