The Working Group on Sterling Risk-Free Rates has published a paper on the identification of “tough legacy” issues. Tough legacy contracts are those that do not have robust fallbacks and prove unable to be amended ahead of LIBOR discontinuation.
The Working Group’s Tough Legacy Taskforce has proposed that the UK government considers legislation to address tough legacy exposures in contracts governed by English law. A similar approach has been put forward by the ARRC in relation to New York law contracts.
The Taskforce has considered whether there is a case for action in relation to various different asset classes in the UK. In relation to bilateral and syndicated loans they comment that the large number of contracts, the diverse nature of borrowers, questions of cost, resource availability and other challenges means that the renegotiation of all these contracts on an individual basis ahead of end 2021 creates practical difficulties. They also consider references to LIBOR in commercial contracts, such as price escalation or penalty clauses, and suggest that a legislative solution may be helpful where parties to such contracts cannot agree an appropriate alternative.
The Taskforce has suggested that other solutions to the tough legacy problem should be considered in parallel, for example having a “wind down” period after panel banks have stopped submitting quotes during which LIBOR would continue to be published via a synthetic methodology. The Taskforce also calls upon market participants to focus primarily on active transition, noting that alternative solutions are not certain to succeed and may not be suitable for all contracts.
The enormous backlog of legacy LIBOR-referencing contracts is a major barrier to wholesale LIBOR transition by the end of 2021. The prospect of a legislative solution may appear attractive to market participants as an easy fix, however parties should bear in mind that it may not have the economic result they expect and they should therefore continue their efforts to actively transition to an alternative rate.