Tough legacy

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Interest rates - reference rates - LIBOR transition.

In this context 'legacy' contracts are existing contracts (1) referencing LIBOR (2) that do not include fallback provisions that cater satisfactorily - or at all - for the continuation of the contract upon LIBOR being permanently discontinued.

'Tough legacy' contracts are once that both (1) contain inadequate fallbacks and (2) are impossible or very difficult to amend in advance of the end 2021 deadline for the cessation of LIBOR.

Tough legacy contract examples
  • Certain bonds (because the use of consent solicitations to transition legacy LIBOR bonds is costly, time-consuming and may require the consent of all of the bondholders).
  • Certain bilateral and syndicated loans (due to the diverse nature of borrowers, questions of cost and resource availability and other challenges).
  • Certain derivatives (particularly where these are used to hedge an exposure which is itself considered tough legacy or forms part of a more complex structure).
A practical guide to LIBOR transition - Slaughter and May - September 2020, p11

Transactions that cannot be transitioned
"arguably the last major outstanding issue [in GBP LIBOR transition] is related to tough legacy and the practicalities surrounding those transactions that cannot be transitioned.
The FCA has published a number of consultations exploring how they might manage the provision of a synthetic LIBOR for use in tough legacy contracts and there is legislation working its way through Parliament to provide legal certainty.
However, this is all happening quite late in the day and so amendments may have to happen at the last minute on these contracts - perhaps another reason to get everything else sorted now.
One comment that we are hearing repeatedly is a reminder from the regulators that whilst a synthetic LIBOR might solve the immediate problem, there is no guarantee how long such a rate would be published – and therefore, synthetic LIBOR should only be viewed as a temporary (bridging) solution."
Status Update – LIBOR transition - Sarah Boyce - Association of Corporate Treasurers - 07 September 2021

See also