LIBOR Transition: Legacy Loans on Hold – Finance and Banking

United States: LIBOR Transition: Legacy Loans in the Background

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Now that the formal end dates for LIBOR were announced by the FCA, it’s time to consider some of the practical implications of the announcement. With the initial end date slated for late 2021, many market players have taken a collective sigh of relief at the possibility of an extension of the deadline. Among all the other complicated tasks that must be done before LIBOR disappeared, getting borrowers, many of whom are oblivious to the coming change, to amend the millions of legacy loans created before LIBOR even came to an end is particularly daunting.

Although the 1-week and 2-month US dollar LIBOR maturities still end on December 31, 2021, the 1-month, 3-month and 6-month LIBOR maturities used in the majority of loans will now end on June 30, 2023. From by Its design, this extension has a number of effects. First, it reduces the number of legacy loans that will need to be changed to replace LIBOR, as some of those loans will expire during the additional period. Second, it gives the lender more leverage to modify some of their loans. A borrower who wants to extend a loan that is expiring or wants or needs a modification or waiver during that time will not be able to simply say no to a new interest rate. Third, for all existing loans, it gives lenders more time to prepare and explain the upcoming change to their borrowers.

Delaying the modification of inherited loans is not entirely beneficial to lenders. Since lenders will not be allowed To initiate new LIBOR loans after 2021, the extension of the LIBOR phase-out extends the period over which lenders will have to maintain and monitor LIBOR and replacement rates. Delaying the modification of existing loans will also delay the adoption of the new rates, which may hamper their success, for example in the development of SOFR term.

Yet with all the other tasks that remain to be accomplished, it’s good to be able to put a lot of the work on hold to focus on operationalizing replacement rates. Old loans are not completely forgotten – the LSTA is expected to release soon with sample LIBOR transition amendment forms and notices for syndicated loans, which can be changed for other loans. Perhaps by the time they are used, the transition of legacy loans will not be such an overwhelming task.

Duane Morris LIBOR Transition Team: Roger S. Chari, President, Joel N. Ephross, Amelia (Amy) H. Huskins, Phuong (Michelle) Ngo and Han Wang.

Warning: This alert has been prepared and posted for informational purposes only and is not offered, nor should it be construed as legal advice. For more information, please consult the full warning.

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The administrator of LIBOR and other interbank rates offered, ICE Benchmark Administration (“IBA”), confirmed on March 5, 2021 the previously announced LIBOR termination dates.

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