LIBOR transition and tough legacy contracts—what are the solutions?

LIBOR transition and tough legacy contracts—what are the solutions?

The Tough Legacy Taskforce, established by the Working Group on Sterling Risk Free Rates has published its long awaited ‘tough legacy’ paper. The paper considers options for dealing with those contracts that currently reference London Interbank Offered Rate (LIBOR) but which may be particularly difficult to transition to risk free rates before the end of 2021. This News Analysis explains why tough legacy contracts are such an issue, highlights key points made in the paper and sets out practical recommendations.

The Tough Legacy Taskforce (the Taskforce) was established to provide market input to help identify issues around ‘tough legacy’. In May 2020, the Taskforce published a paper on the identification of Tough Legacy issues.

The paper makes it clear that firms need to deal with contracts referencing LIBOR primarily through:

  • amending the contract to reference a suitable alternative rate (typically the recommended risk-free rate for the currency), or
  • using a robust fallback that enables the contract to move to a suitable alternative rate upon an appropriate event (eg as International Swaps and Derivatives Association (ISDA) are doing with their revised documentation)

However, it acknowledges that this may be very difficult or impossible for certain contracts, the so-called ‘tough legacy’.

The paper starts by setting out its recommendations, before highlighting particular issues for the various markets that use LIBOR.

Why do tough legacy contracts create such a problem?

Tough legacy’ is normally used to refer to contracts that:

  • mature after LIBOR is due to be discontinued
  • contain problematic contractual fallbacks, for example to rates that are uneconomic or can’t be calculated (or no fallbacks), and
  • are, for one reason or another difficult to amend

Contracts that can’t be transitioned to a suitable risk-free rate prior to LIBOR being discontinued are at risk of becoming unworkable, leading to significant economic risk to the parties, as well as wider market disruption if there are large numbers of these contracts.

How does the paper conclude the tough legacy issue should be addressed?

The paper recommends that the government considers a legislative solution to the tough legacy issue.

This suggestion is partly driven by the proposal for legislative relief under New York law put forward by the Alternative Reference Rate Committee, as a similar approach in the UK would help to bring about international consistency in the treatment of tough legacy contracts.

However, the paper notes that there is no guarantee that such a solution will materialise. It therefore recommends that:

  • other solutions be pursued in parallel, including the implementation of a ‘synthetic methodology’ for a wind down period following the LIBOR panel bank departure, and
  • market participants focus on proactive transition of contracts away from reliance on LIBOR

What might a legislative solution look like?

The paper makes no specific recommendations as to how legislation could address the issue. However, it may follow a similar approach as the legislation proposed in the US. This requires, in summary, the use of the recommended benchmark replacement where the contract language is silent or the fallback provisions are based on LIBOR. The aim of the legislation proposed in the US is to prevent parties from refusing to perform contractual obligations, or declaring a breach of contract, as a result of the discontinuance of LIBOR or the use of the statute’s recommended benchmark replacement.

What tough legacy issues are there in the derivatives market?

The Taskforce considers that the primary mechanism for transition should be for parties to pro-actively amend their derivatives positions and/or adopt suitable fallbacks (via the ISDA IBOR Fallback Protocol or otherwise). However, certain derivatives contracts may fall within the tough legacy category, and therefore be hard to amend, due to the following factors:

  • adoption of the ISDA IBOR Fallback Protocol is voluntary for uncleared derivatives
  • there are likely to be cases where a derivative is used to hedge an exposure which is itself considered tough legacy—the derivative will be subject to the same or similar constraints as the instrument it is used to hedge, thus making the derivative tough legacy as well
  • for non-linear products, fallbacks are possible but may require additional amendments to supplement the amendments made by the ISDA IBOR Fallback Protocol

What tough legacy issues are there in the debt capital markets?

Consent solicitation can be used to transition legacy bond contracts and has already been used transition a small number of bond contracts across to risk free rates.


  • use of consent solicitations to transition the whole of the legacy LIBOR bond market is unlikely to be feasible because it may not always be possible to obtain the requisite consent from bondholders
  • it is very unlikely to be possible to transition all affected legacy bonds in the time available as it is a long and costly process, and
  • within more complex arrangements, such as securitisations or repackagings, there are additional difficulties where the originator or sponsoring entity no longer exists or is insolvent, or where the economic interest in the transaction has been sold to a third party

There are likely therefore to be a number of tough legacy contracts in the bond market which will need a different solution.Consent solicitation can be used to transition legacy bond contracts and has already been used transition a small number of bond contracts across to risk free rates.

What tough legacy issues are there in the loan market?

The bilateral loan market has a very wide variety of fallback language across a high volume of individual loans. The ultimate fallback for syndicated loans is typically costs of funds. Importantly, fallback language for both syndicated and bilateral loans is generally designed to deal with short term disruption rather than the discontinuation of LIBOR. Large-scale transition to risk-free rates is therefore required.

The syndicated loan market has the particular challenge of having to obtain lender consent for changes (though this is mitigated somewhat by the wide-spread use of the revised ‘replacement of screen rate’ clause, intended to make it easier to amend facility agreements to replace LIBOR).

Key issues for the the loan market include:

  • the very large number of bilateral and syndicated loan contracts
  • the diverse nature of the borrowers
  • questions of cost and resource, and
  • other challenges to transition (eg creditor standstills, financial restructurings or insolvency proceedings)

These factors are likely to mean that the renegotiation of all these contracts on an individual basis ahead of end 2021 (when LIBOR is due to be discontinued) will be a huge challenge.

What is the practical impact of the paper’s conclusions?

Unfortunately, the paper confirms that there is no magic bullet for the tough legacy issue.

In terms of a legislative solution, there would obviously be challenges to getting any such legislation agreed and passed in the time given the other pressing issues the government is addressing. Any such solution will inevitably be a somewhat blunt instrument and there is likely to be push back or litigation further down the line from those who consider themselves economically impacted by the legislation.

‘Synthetic LIBOR’ also poses a number of challenges—most obviously the problem of where to source the data from. Again, there are likely to be winners and losers, leading to litigation risk. Any synthetic LIBOR may also fall outside the documentary definition in some cases, resulting in all those issues of contract breach it is intended to avoid.

The message to the markets is that proactive transition still needs to be the key focus, wherever it is at all possible.







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About the author:

Miranda is a solicitor specialising in leveraged and acquisition finance. She trained at Hogan Lovells International LLP and qualified into the international banking and finance team. During her time at Hogan Lovells she worked on a variety of domestic and cross-border transactions, acting for both borrowers and lenders. She also experienced secondments to Barclays Bank PLC and Kaupthing Bank hf.