September 30, 2019
By R. Sarah Bahmani, Esq.Reading Time: 4 minutes
LIBOR, the London Inter-bank Offered Rate, is estimated to be tied to over $240 trillion dollars of financial arrangements globally – including public and private loans and bonds, credit cards, mortgages, student loans and interest rate derivatives – and will be discontinued by 2021. LIBOR is a reference rate that is calculated daily from voluntary submissions provided by a panel of banks. The panel banks each provide the rate at which they believe they can borrow currency from another bank. When LIBOR is rising, the indication is that banks believe that there is a greater risk of defaulting on loans, thereby necessitating a higher interest rate to offset the potential risk of that default. The rise or fall of LIBOR generally indicates the rise or fall of interest rates.
As a matter of historical interest, LIBOR was first published in 1986, and quickly became the benchmark rate that influences interest payments on a wide range of financial products and contracts. By the end of 2016, contracts based on USD LIBOR totaled nearly $200 trillion in gross national exposure, according to the New York Fed. Last year, Bloomberg reported that LIBOR underpinned $370 trillion in contracts globally.
LIBOR had been under scrutiny for some time, by some accounts as early as 2003, as accusations and later investigations revealed that certain panel banks were dishonest in their submissions to manipulate LIBOR to make profits. The validity of LIBOR was challenged by these scandals and more so, after billions of dollars of fines were levied by regulators against panel banks proven to be involved in LIBOR manipulation. As a result, many panel banks were deterred from further participation with LIBOR and its use as a widely regarded benchmark has fallen out of favor. In 2017, it was announced that LIBOR would not be sustained after 2021. The impact of the LIBOR is widespread, and market participants will be impacted from consumers, businesses, investors, to banks and countless others.
Many adjustable rate financial products are tied to the performance of LIBOR. Now that LIBOR is going away, many questions arise such as what will dictate my interest rate after LIBOR? Does my contract have a fall-back provision? Similarly, businesses big and small will need to identify contracts that are tied to LIBOR and ask themselves similar questions to assess risk and navigate the course of action moving forward.
If your legal department is losing sleep over the sunsetting of LIBOR take heart. Although you may have a large volume of contracts to repaper before this financial industry benchmark becomes obsolete at the end of 2021, you can put systems and partners into place now to minimize the workload and stress on your team.
What can you do to prepare?
- Identify. The first step of the process will necessarily include identification of all contracts referencing LIBOR. Considerations during this identification phase include: (1) whether there are any exceptions that need to be addressed to ensure an exhaustive search; (2) whether there is a way to systematically identify those contracts where the LIBOR reference does not require further action, i.e. the maturity date of the contract is prior to 2021; and (3) how you will determine, upon identification of the universe of LIBOR contracts with potential impact, the priority order of contract review by contract type/customer; topping the list should be those contracts that will need additional time for renegotiations and internal systems compliance.
- Review and analyze. Once all contracts referencing LIBOR have been identified, those requiring additional action will need to be reviewed and analyzed to assess LIBOR implication, fallback provisions and whether contracts will need to be renegotiated.
- Determine next steps based on categorization. Examples:
- Contract needs no further action; it is not impacted by the LIBOR transition.
- Contract can be amended by a letter to the customer with updated terms. Customer contact information must be extracted, and a template letter prepared and sent to the customer with updated terms. Internal systems modification must be initiated to ensure systems compliance with updated terms by the date designated in the letter.
- Contract needs to be renegotiated in accordance with the LIBOR replacement. Customer contact information must be extracted, and a notification letter prepared and sent to advise the customer of the pending renegotiation. Create a playbook for renegotiations and the associated process.
How will you get it all done?
The sheer volume of time and attention this task could require may at first seem overwhelming. Most legal organizations run lean to begin with; adding another project, especially one that will likely require a dedicated project team, is the last thing you need.
Fortunately, an alternative legal service provider (ALSP) can provide you with a team equipped to carry out project management, training, workflow design, labor and delivery of the amended contracts seamlessly so that you don’t have to tie up your own attorneys and paralegals. They can continue working on priority projects, as the ALSP manages your LIBOR-related activities.
Your ALSP partner should provide you with:
- A dedicated resource team that includes paralegals and seasoned practitioners with a range of skills that enable an end-to-end solution. Team members should be prepared to assist at every stage, from the identification phase through repapering efforts, using your chosen technology.
- The workflow design, a substantive training protocol/playbook and training modules. Workflow design is critical to ensuring that similar contracts are treated in the same way from a process perspective through a logical, documented, defensible approach. Training ensures that every person working on the project has a roadmap for dealing with various contract provisions and conditions.
- Project management and quality control. Skillful project management and a rigorous quality assurance process are essential to ensuring accuracy and defensibility of process.
- Efficient and cost-effective work product delivery. An outstanding ALSP will work to keep your costs down and efficiency high by streamlining processes, leveraging technology and allocating resources to functions accordingly, as a means of cost control.
About Tower Legal Solutions:
Tower Legal Solutions is a WBENC certified women-owned alternative legal services provider that focuses on project staffing, temporary attorney engagements, and managed services. Our specialties include secondments, managed review, contract management and direct hire placement. Our clients can count on transparent and value-added people solutions that solve staffing challenges and optimize efficiency.