LIBOR reform: Who pays?

Why are we recording this video?

The transition from LIBOR has raised a huge number of complex issues, which are being wrestled with by market participants. It’s common ground that there will be huge costs associated with the transition from LIBOR, but there’s not been much real discussion on the thorny issue of who should bear these costs.

What kind of costs will be incurred as a result of the transition from LIBOR?

If we look at the kinds of costs which will be incurred as a result of the transition from LIBOR, I would differentiate between “systemic costs” and “transactional costs”.

Systemic costs involve all the costs associated with getting a bank ready for the transition from LIBOR. For example, the way interest is calculated is fundamentally changing, so we’re probably talking millions of dollars for extensive updates to IT systems and the like. These costs will certainly fall on the banks.

However, on a much smaller, but still significant, scale, there will also be transactional costs – these are costs which apply to each transaction, in particular for engaging law firms to assist with the amendments to the relevant finance documents, and perhaps issuing legal opinions.

How do we determine which party will bear the transactional costs?

Fundamentally, it’s a matter of contract as to which party should pay these transactional costs. In other words, the parties can decide between themselves who pays. And traditionally, we know that banks have tried to pass on costs to borrowers wherever possible.

Is there any difference between bilateral loans and syndicated loans?

For bilateral loan transactions, it will really be a question of whether the standard terms of the relevant bank are drafted widely enough for the banks to pass these transactional costs on to the relevant borrower.

The situation is more interesting when we look at syndicated loan transactions. For LMA or APLMA-based syndicated loans, the standard costs and expenses clause makes the borrower liable for costs and expenses arising (a) for amendments requested by the borrower, or (b) for amendments required as a result of a change of currency. The LIBOR amendments don’t fall into either of these categories, so borrowers using standard LMA or APLMA documentation will not be liable for the transactional costs – those costs will fall to the lenders.

Have any lenders amended the standard costs and expenses clause to address this point?

We have started to see some lenders amend the standard LMA or APLMA costs and expenses clause, so that borrowers are expressly liable for paying the transactional costs associated with the repapering exercise.p>

It’s too early to say whether this will be adopted across the market. However, it’s easy to imagine strong borrowers rejecting this approach, on the basis that the transaction to risk free rates was required as a result of misconduct by certain banks, and was not initiated by borrowers.

Are banks doing anything to minimise transaction costs?

Some banks are already taking steps to minimize LIBOR-related transaction costs. The sheer number of affected transactions means that there is plenty of opportunity to try to reduce costs using economies of scale.

Some banks are talking to law firms and other professional service providers to look at ways of using technology to minimize the cost of producing, finalising and executing amendment agreements. Similarly, some agent banks are speaking to law firms to assist with the repapering exercise for all of the syndicated loans where that bank acts as agent. Asking one law firm to handle 100 transactions is going to be cheaper and more efficient than asking 100 (or even 20) law firms to handle those same transactions.

It’s going to be interesting to see how the market develops in 2020.