Loan market products are widely viewed as presenting some of the more complex issues to be addressed in order to achieve a successful transition away from LIBOR. In this 16th episode, Kam Mahil of the Loan Market Association (LMA) discusses aspects of LIBOR transition relevant to the international loan markets with Dechert's Sarah Smith and Karen Stretch. The session offers a wide-ranging discussion of the LMA’s work in the area and much more, including insights into the hot topics of term rates and credit sensitive rates, as well as a look at the road ahead.
Loan market products are widely viewed as presenting some of the more complex issues to be addressed in order to achieve a successful transition away from LIBOR. In this 16th episode, Kam Mahil of the Loan Market Association (LMA) discusses aspects of LIBOR transition relevant to the international loan markets with Dechert's Sarah Smith and Karen Stretch. The session offers a wide-ranging discussion of the LMA’s work in the area and much more, including insights into the hot topics of term rates and credit sensitive rates, as well as a look at the road ahead.
Intro 00:05
Welcome to Dechert's LIBORcast, where industry leaders come to talk LIBOR transition.
Sarah Smith 00:12
Hello and welcome to today's session, which is the 16th installment of the Dechert LIBORcasts. I'm Sarah Smith, a partner in global finance practice of Dechert LLP based in London, and the clients with whom I work range across the spectrum of users of financial products. So they include bank and non-bank lenders, borrowers and investors in issuances of debt instruments, all of whom are impacted by the transition away from the LIBOR benchmark rates to risk-free reference rates. My co-host in today's session is Karen Stretch, who's also a partner in Dechert's London office, and she is part of our financial services team, whose practice focuses on derivatives and related matters, as well as leading Dechert's coverage of the impact of LIBOR transition on derivatives. Karen is the go-to person for LIBOR issues for our financial services practice group. Karen and I are both members of Dechert's global LIBOR Transition Task Force, which has been driving our efforts to assist clients in dealing with the issues raised by the transition away from LIBOR. We focus predominantly on UK, European and Asian aspects of the LIBOR transition and work very closely with our colleagues on the Task Force in the United States who focused on U.S. issues.
Karen Stretch 01:30
Thanks, Sarah. We are delighted to be joined today by Kam Mahil, Senior Director at the Loan Market Association, the LMA. Loan products are widely viewed as presenting some of the more complex aspects of LIBOR transition for a number of reasons, including the diversity of different loan products and the wide spectrum of borrowers from consumers to large conglomerates. It is estimated that globally, trillions of dollars of syndicated loans still need to be amended or replaced to provide for a LIBOR alternative. In the sterling market, this year has seen several milestones set by the working group on selling risk-free reference rates with respect to the use of sterling LIBOR CommonPass, including the milestone reached on 1 April this year. No new Sterling LIBOR-linked loans should be entered into from this date if the loan has a tenor beyond 31 December this year. Kam, together with her colleague Keith Taylor, have been leading the LMA's work on LIBOR transition, educating and engaging with members to assist in seeking consensus on various aspects of the loan market's transition away from LIBOR, and to develop new template documentation. Kam, thanks for taking the time to speak with us on LIBOR transition, and for offering to share the LMA's perspective and work on these issues. We'll come onto this shortly, but we know you're involved in many groups and subgroups on LIBOR so you have a lot going on. We will go into some of the more technical issues, but what we really want to use this session for is to get your high level download on the LMA's approach to LIBOR transition and current issues so our listeners can understand more about the LMA's work in this area. Before we start the questions, Kam, it would be great for our audience if you could give us a recap on your role, and the LMA's work on LIBOR transition very generally.
Kam Mahil 03:24
Great, thank you, Karen. And thank you also to Sarah for inviting me to this LIBORcast. So I'm part of the legal team at the LMA with a focus across investment-grade leveraged finance and also export and commodity finance. But since Andrew Bailey's speech in 2017 on the future of LIBOR, I have spent a large part of my time focusing on LIBOR transition in the loan market. And as you both know, this is a very involved topic and for me has meant representing the LMA and the loan market on the various currency working groups globally, drafting industry papers for those working groups, regular dialogue with regulators, but also other trade associations and key players in the industry, responding to the many consultations that have taken place, along with education of members and the wider market, and of course, producing documentation and guides to the market as well.
Sarah Smith 04:24
Thank you, Kam. Before we hear more about some of the specifics of the LMA's work on LIBOR, we'd like to start with a big question. We're hearing a lot about 2021 being the year for LIBOR transition irrespective of currency. In your view, what is the current state of play of the LIBOR transition in the loan markets? And before you answer, I have to say that I really love the countdown clock on the LMA website which I think does rather focus the mind on the timeline.
Kam Mahil 04:55
Thank you. I completely agree it does really focus the mind and if you haven't visited the microsite in a while it can surprise you just how little time is actually left. And you can see the seconds counting down. And I think the loan market has actually come a really long way in the last year. It was mentioned in the introduction that the Q1 deadline in Sterling for no new selling LIBOR facilities is now in effect. And that seems to have gone relatively smoothly. And we are seeing deals being done and confidence gaining from clear conventions being in place in most jurisdictions, and also the production of recommended form documentation. I think that the tools for transition in the loan market are largely in place. But the key focus now is on legacy transition, which is a very big task, but also trying to increase competence in transacting multi-currency deals, given the different paces of transition.
Karen Stretch 05:52
Thanks, Kam. So you've already covered a lot of issues there. But starting with theLMA's work itself and turning to what you've been doing so far, for the benefit of those listeners who are not in the detail as much as you or I, can you set out for us in basic terms the current position on how the LMA has approached LIBOR transition across its recommended form documents?
Kam Mahil 06:16
Yeah, sure. So we currently have a set of core risk-free rate documents which members can use for the transition. And those were originally published as exposure drafts, but we moved those two recommended forms in March. And essentially there are two approaches available. So one is having a LIBOR document with an in-built switch to risk-free rates. And the second is having a Day 1 risk-free rate deal coupled with your IBOR for Euros. And we've also published a document to assist with legacy transition. So those are the core RFR documents which we expect our members to be using to help them with their documentation. And we're currently in the process of starting to convert our existing suite of documents to be based on risk-free rates, starting with our investment grade and real estate finance suite. And we're also publishing a drafting guide for the rest of our suite, as it will take us a bit of time to amend all of our recommended forms. It's a bit of a running joke internally that the LMA has its own legacy book problem to deal with.
Karen Stretch 07:23
Thank you very much, that's very helpful. So you've just, going back to Sarah's first question and the first question, you mentioned legacy deals being the focus and multi-currency deals being the focus. And specifically for those multi-currency deals, we are seeing different paces of transition. For example, in the Sterling loan market deadlines on new use have already passed. So while we are working on multi-currency facilities, there may need to be a hybrid approach incorporating rates switch language for certain currencies, and the new interest rate provisions dealing with daily RFRs for other currencies. It is also not clear, although a consensus appears to be emerging for some currencies, on the approach to be taken to compounding daily rates to produce an interest amount at the end of a period. The announcement on the recommended Euribor fallbacks as made earlier this month, and there is ongoing uncertainty around the replacement rate to US dollar borrowings. Can you explain at a high level how the LMA is approaching the preparation of templates for multi currency facilities agreements? It's a big question.
Kam Mahil 08:31
It's a very big question. I think it's one of the key questions at the moment. So we have already produced a recommended form of multi-currency agreement which does provide flexibility for different pieces of transition. So it envisages a simple approach of applying compounded risk-free rates for the local currencies alongside your IBOR for Euros, but also contains an in-built switch mechanism for anything that's not based on compounding from the start. So you could use the technology in there to stagger the transition of different currencies. And that document already caters for a switch from Euribor to risk-free rate. So deals in some ways with the Euro Working Group recommendations. But it also adopts a simplified approach to multi-currency deals in that it adopts the same conventions across different currencies. And one of the reasons we did that was for simplicity in terms of producing a document, but also from an operational perspective, it seemed to make more sense to have consistency across currencies, rather than an agent and a borrower having to manage different rates and different conventions per currency. And certainly we have seen that approach being adopted in some deals in the market. In respect of the US, I think that's a bit more of a difficult situation because there are effectively currently five different approaches as far as I've counted under discussion in the US domestic market, and we're not planning to update our documents to reflect every single approach. And what I would say is that market precedents to date do seem to use compounded SOFR alongside compounded SONIA. So any changes to our documents via US dollar, I think would need to be based on market precedents.
Sarah Smith 10:17
Thank you. We said earlier that loan markets are one of the more complex areas for LIBOR transition. So picking up on that, the loan markets are an area where there needs to be and we're seeing different approaches depending on the underlying market, and particular asset types and currencies. What can you say to us generally about the approach across sectors, for example, leveraged finance, project finance, real estate finance? Do you see any evidence LIBOR label transition is affecting these loan products differently from each other?
Kam Mahil 10:50
Well, I fully think LIBOR transition does, as you say, have differing impacts for different products. And as a result, we did release a series of notes earlier this year focusing on considerations for particular sectors, like the leveraged finance, market, real estate, finance and developing markets. I think broadly, the real estate finance market seems to have adapted very well to compounded risk-free rates. And at least in the Sterling market, there seems to be a good level of activity in that sector. With leveraged finance, we have recently seen the first SONIA loan, I think, driven by the Q1 milestones for Sterling. But because the leverage market is largely Euro- and US dollar-denominated, and driven by US practices, I think transition has been affected by the timeline in those currencies, and also the uncertainty that we already talked about in the US, I think, for project finance. And I would also link in export finance and developing markets there as well. I think there are parts of those markets that can work with compounded risk-free rates. And we've heard of parties looking to adopt longer look-back periods, so for example, 10 to 20 business days. But there are certainly parts of those markets which do need a forward-looking term rate. And again, because much of the exposures are in dollar and in Euros. Again, the uncertainty in the US has had an impact on transition. And I think there's also important decisions to be made as to what the fallback should be to forward-looking term rates, because we don't want to end up in the same situation as we are in now. And currently, there's no consensus on that just yet.
Sarah Smith 12:28
And talking about not ending up in the same situation again, let's turn now to current facilities that expire after 2021 - the legacy book, as it were, for those facility agreements that include the rate switch provisions provided by the LMA. Can you explain to our audience how those provisions are intended to work and when the rate switch would occur? And what timing considerations should lenders and borrowers under these agreements bear in mind?
Kam Mahil 12:56
So the rate switch provisions provide for a loan automatically switched from a LIBOR-based loan to a risk-free rate based loan. And the trigger for that is a rate switch trigger event. But actually the rate switch won't occur until the actual rate switch date occurs. And the timing really depends on whether the parties have included a backstop rate switch date within their agreement, because we have seen some facilities, including such backstop rate switch dates which actually occur before the end of the year, in which case that's when transition will happen. Although it's worth saying that if there are any outstanding loans, they would continue until the end of their interest period, so any switch wouldn't sort of cut across outstanding loans that are in existence. Other than the backstop rate switch date, there are rate switch triggers in the document, which are based on either sort of cessation or non-representativeness events. And the FCA's 5 March announcement in relation to LIBOR did constitute a rate switch trigger event for the LIBOR currencies. And the way that the LMA document is drafted is that a rate switch trigger event that applies to one tenor only of a screen rate for a currency actually triggers a switch to the use of compounded risk-free rates for that currency generally. So in general, the rate switch date would happen at the end of the year unless you had an earlier backstop date. And that's a bit different to how ISDA documents work, which provide for interpolation of continuing tenors. And this different approach was actually based on feedback that we received from members, although I think some market participants are now looking to change the trigger date so that US dollar LIBOR switches happen in 2023 rather than the end of this year. Because I think at the time, people thought that everything would be moving at the same time rather than there being two different timelines for US dollar LIBOR.
Sarah Smith 15:01
Thank you, that's very informative. Thank you very much. You mentioned when we were talking a question or so back that some products need term rates - export finance, for example. Although it seems less so in the UK, where the regulators and working group on Sterling risk-free reference rates appear to have concluded that term rates are not required except for the discrete handful of examples that you mentioned. And the LMA announced at the end of March this year that it does not currently intend to prepare recommended form facility documentation for forward-looking term SONIA reference rates or TSR. For the US dollar, the ARRC published setup market indicators, which it said it would consider in recommending a forward-looking term SOFR. And some banks have apparently indicated that they may use Ameribor or similar term rates with a built-in credit premium. So against that rather complicated and disparate background, what evidence would the LMA need to start producing facility documentation or interest rate provisions that reflect the use of term risk-free reference rates? And what difficulties if any, do you see in preparing such documentation? Or is there a chicken and egg situation here with market acceptance required but difficult to create?
Kam Mahil 16:24
Yeah, so I think it's still quite a difficult situation. Because in relation to the US, for example, we still don't know what the use cases for a forward-looking term rate will be. And the ARRC has indicated in various statements that the use cases will be limited potentially in a similar way to the way they have been in the UK. So I think we need to understand what the limitations are. But hopefully that will be forthcoming in the coming months. I think we will look to produce in due course term rate documentation, certainly for our developing market and export finance suites because there are clear use cases there for term rates. And we did publish a note earlier this year outlining considerations for the markets in using those term rates, highlighting in particular the areas that parties need to think about. But also we did provide some drafting for the term SONIA reference rates as well to try and assist the market with producing such documentation. And I think that does go a long way to allowing market participants to produce their own term rate documents because ultimately, it isn't as hard as producing documents based on compounded risk-free rates because at least there is that term structure there. So we don't necessarily see the lack of an LMA term rate document as being a barrier to doing deals on term rates because the architecture is largely there. And the missing pieces I think are largely commercial decisions. For example, I mentioned earlier that one of the key factors that we really need feedback on is what the appropriate fallbacks to a term rate should be. And whilst the ARRC has a waterfall solution, I don't think that really works for products which have a genuine need for a forward-looking term rate, because it envisages you falling back from a forward-looking rate to a backward-looking rate. So I think ultimately, it's got to be a commercial decision for parties to make about what the appropriate fallback should be. Unfortunately, it's not something that the LMA can take a decision on. Certainly with our compounded risk-free rate documents, we had very clear feedback from the market about what people wanted as the fallback. So I would really encourage market participants to think about what appropriate fallback should be and then give us that feedback really to help us move forward.
Karen Stretch 18:43
Thanks, Kam. So we've spoken a lot already about the risk-free rates or the RFRs, and the recommended forms of multi-currency term and revolving facilities agreement that the LMA published at the end of March do reference the RFRs. There does, however, seem to be a preference from some participants for a credit-sensitive rate, instead of those overnight RFRs. And recently, there has been a lot of high-profile commentary around credit-sensitive rates and also their potential limitations. And so I've got two kinds of questions wrapped together. Firstly, do you anticipate that documentation may be changed to capture credit-sensitive rates? And then from the data that the LMA sees, is there any perceived change in approach to capture credit-sensitive rates, including perhaps dynamic credit spreads?
Kam Mahil 19:37
Yeah, there's certainly been interest amongst certain banks that credit sensitive rates, and I think a lot of commentary particularly in the US domestic market, but there has been very limited market activity so far, and we haven't seen as much interest I would say in the European markets, or any deals, probably because there's a bit more certainty over here around compounded risk-free rates and deals that are being done on that basis. I think for the LMA, there are no current plans to include such credit-sensitive rates in our documents. And there are three main reasons for that. I think the first being the comments that have been made by the UK and the US regulators around their concerns about the use of such rates and effectively potentially creating LIBOR under another name. I think the second, the very vocal comments that have been made by some borrowers, particularly on the SOFR symposium, about their concern with such rates, and certainly the LMA's LIBOR Working Party we expanded that a few years ago to include direct representation from borrowers, and also the Association of Corporate Treasurers. So for us any decision to include credit-sensitive rates would need to have borrower supports before we could do that. And then lastly, I think there would need to be deals in the European market, using the rate rather than the existence of an LMA document creating a market for that rate. And as I said before, in the US there do seem to be you know, various types of rate under consideration. So if we were going to provide options for US dollar, I think we would need to provide all five that I've counted so far to be fair, and I think that could risk causing further confusion.
Sarah Smith 21:24
That's just what we need at the moment, people confused. Okay, so we've talked briefly about the recommended forms that were published in March multi-currency term and revolving facilities. And these pick up on the recommendation of the working group on Sterling risk-free reference rates by adopting for Sterling the proposed compounding in arrears and look-back with no observation shift approach. Do you expect to make further updates to the suite of recommended facility documentation on these concepts? And what evidence of acceptance of these concepts is the LMA seeing in the loan markets? And there's a very helpful compounded methodology supplement and compounded rate supplement which seem eminently adaptable if possible. And in addition, could I ask you how forthcoming lenders and borrowers are being in sharing information with the LMA on points such as this? I think lest the LMA publishes on a periodic basis of publicly disclosed RFR referencing loans is actually very useful, but I just wonder how forthcoming you're finding market participants being.
Kam Mahil 22:36
So yeah, we are not looking to make any changes to the concepts in our documents at this stage, because as you say, they were based on the Sterling Working Group recommendations. So we'd only look to make changes, I think, to the extent that the working group made changes to those underlying recommendations, or whether we saw over time that there was a change in market practice and the way those conventions were being adopted. And I would just highlight that we have produced some different versions of our documents with some of the different concepts. So for example, there's a version with observation shift, and then versions without the observation shift, because some markets have preferred to use that. And for example, Swiss deals have been using observation shift, because the Swiss recommendations recommend observation shift with lag as the alternative. So we've made both available. And certainly we are trying to keep track of where the market is heading. And it's been pleasing to see the uptake of the LMA documentation, but also the Sterling Working Group recommendations on transactions, we do see some differences in market. So as I mentioned, we've seen Swiss-only deals tend to use the observation shift because that aligns with their local recommendations. But in terms of the list of loans, I would say generally, parties have been forthcoming about sharing further details when we have asked them, which is really great. And we are very grateful for people being so, so open. But of course, we would love it if parties were more proactive in terms of sharing their deals with us, because often it's down to us to identify press releases, and then go out to the banks and to the borrower and ask for the information. So yeah, that's a plea that I would make to market participants. Because as you say, I think it is really helpful for people to see you know, what others are doing and try and take sort of inspiration or comfort from that.
Sarah Smith 24:34
So there we go. There's a there's a plea to the market: help. You know, if you want to help, then help yourselves by providing the data. Now, this year is going to be a busy one for developments of the so-called statutory solutions for LIBOR transition. So the Financial Services Bill is now a Financial Services Act 2021. Although the provisions amending the benchmark regulation are not yet in force, but we are expecting to see a lot of activity. Well, we are seeing a lot of activity from the FCA with respect to its powers pursuant to the amended UK BMR. Does the LMA have a view on how these powers may help LIBOR transition in the loan market? And does the LMA, for example, contemplate that there will be many loans or types of loans that could fall into the tough legacy category - we saw the consultation paper on that just last week - and therefore be permitted to use so called synthetic LIBOR under Article 23D? And if so, what changes if any, would be required to be made to the LMA recommended form documents?
Kam Mahil 25:40
Yes, I think there certainly will be loans which fall into the category of tough legacy given the sheer volume of outstanding loans. But also deals where, or lender consent may be required may not be forthcoming. And also transactions for example, where third-party consent is required to amend the loan. I think it's a bit difficult to say how many loans will fall into that category. Just because information around the terms of loans are not always public. But whether loans can use synthetic LIBOR, I think also is is ultimately a question for the FCA. And there are some questions that they've asked in their consultation. So I would really encourage institutions to respond to the FCA consultation paper, which closes on 17 June, which does sort of set out some requests for information around the scope of use of synthetic LIBOR. And I think given the FCA powers apply to UK regulated institutions, you know, one thing that we are very keen to ensure is that there isn't an unlevel playing field that ends up being created within syndicates as to the use of synthetic LIBOR. I think in terms of LMA facility agreements, a synthetic LIBOR, which is based on a term rate plus a credit adjustment spread, shouldn't necessitate too many changes to LMA facility agreements given it will be a sort of a term rate structure. But there will be aspects that parties will need to think through such as fullback clauses, definition of business days, break costs, etc. But I think we need a bit more detail on exactly what the shape of synthetic LIBOR is going to look like.
Karen Stretch 27:25
Thanks, Kam. So that's obviously with the the FCA focus and the changes to the UK benchmarks regulation. But there are obviously statutory solutions already progressed in the EU and in the US. So an obvious question for our international client base is how the various legislative proposals fit together, if at all, we don't expect you to answer completely now is a big question. But what can you speak to us about how the LMA's work and legislative proposals will interact?
Kam Mahil 27:59
Yeah. So as you say, Karen, this is actually a key question that I have myself with the legacy legislation. We've certainly spent a lot of time speaking with regulators around our concerns on how the legislative proposals fit together. And I have to say, I'm not completely clear how exactly they do fit together and operate particularly in the context of multi-currency loans, with lenders from multiple different jurisdictions. I think there is a real risk of an unlevel playing field being created within syndicate. So that is something that really needs to be managed. And we do continue to pursue the point with regulators in different jurisdictions, along with continuing to assess the information that's coming out from the regulators on tough legacy is actually a lot of the interaction is going to depend on how the powers will be used. So we are looking at various scenarios, you know, how would they work under the various pieces of legislation, but I don't think there's enough clarity at this stage because whilst the framework legislation is in place, certainly in the EU and UK, there are further ongoing consultations on exactly how those powers will be exercised. So as a result, we do tend to place caution on reliance being placed on top legacy solutions. So I would encourage parties to actively transition to the extent feasible.
Karen Stretch 29:25
I think that kind of leads quite, segues quite neatly into the next couple of questions which are around coordination, but we're going to move along a little bit and start with specific coordination. And one topic we don't have much time to cover today but that is a part of my practice area and which we know the LMA is closely considering and has identified, that you have actually identified in your materials as for consideration is the interaction between the loan market and hedging. You've already mentioned ISDA's work and the LMA's work. ISDA very recently on 13 May published materials relating to compounding and averaging of the RFRs and alignment is clearly important. And this is an issue that needs to be considered on a case-by-case basis. But what can you say to us generally even about issues around loans and hedging?
Kam Mahil 30:19
Yeah, so indeed, it's ultimately an issue that needs to be considered on a case-by-case basis and parties, as they always have had to, even in the LIBOR world need to look at their loan documents alongside their hedging documents and be aware of any differences. And I think, particularly on LIBOR transition, parties need to think about whether the loan and the hedge are moving to the same rate. Are they moving to the same conventions? What point are they transitioning? And is there consistency of approach to the credit adjustment spread? And as you mentioned, we've highlighted some of these issues in notes that we've produced on our website, as long as highlighting all the great work that ISDA has done as well, including, you know, having bilateral amendments that people can use to transition their loans if that protocol doesn't work, but also their newly published rates options. Actually, ISDA kindly shared a version of those with us in advance and allowed us to make comments to ensure that the loan market position was reflected in the rate options. And I think that's a really important step in alignment. Because certainly people have been very concerned about the different conventions between ISDA and the cash market. So I think the publication of the rate options is a really good step forward.
Sarah Smith 31:37
On a slightly more focused question, do the LMA and the LSTA coordinate their work on LIBOR transition?
Kam Mahil 31:46
So we have regular dialogue with the LSTA. And at a minimum, we've got fortnightly calls just on LIBOR transition given how important the topic is. We were also both involved in a global loans group, which involved the chairs of the different currency loan working groups getting together to discuss how LIBOR transition and the different loan markets was being dealt with. But I think ultimately, different jurisdictions have had a different focus and different timelines, which has meant that the markets have moved in different ways. For example, in the US, we're still hearing borrowers and banks being very much focused on the need for a forward-looking term rate, where certainly in the UK and the European markets, when we speak to borrowers and banks, they seem to be more concerned with alignment with derivatives. So there do seem to be a difference in approach there. But you know, we are coordinating to the extent that we are able to given that our markets are moving in different ways and at different times.
Sarah Smith 32:52
Yeah, and you've mentioned now several times various different types of coordination, which is actually very reassuring, I'm sure absolutely necessary. But can you speak to us about the LMA current coordination effort, who you're working with on coordination efforts, both here in the UK and internationally?
Kam Mahil 33:12
Yeah, to as I mentioned, we sit across various of the currency working groups. So we try and use our role on those to at least bring alignment. So for example, you know, recent, most recently ensuring that flexibility was included in the Euro Working Group conventions to allow parties to align their conventions with those that have been established in the UK in the US. We also chair a working party of trade associations internationally, which allows a forum for the trade associations to share information and also perspectives on transition as well. And we're also working with other trade associations to help educate members, too. And we're also part of an ICC export finance committee, as well focusing on local transition, which is designed to coordinate efforts between banks, and ECAs on transition in the export finance market. So, yeah, there's a lot going on and sort of various pieces to fit together.
Karen Stretch 34:12
That is a lot going on. And it will be critical for transition that market participants are engaged really and engaged this year. Does the LMA get the sense both from its members and more widely, that market participants, particularly on the borrower side, are engaged with LIBOR transition?
Kam Mahil 34:33
Yeah, so I think engagement has increased since the Sterling Q1 deadline came into effect, and also the FCA announcement on 5 March, which I think made things very real for a lot of people who had probably thought LIBOR would still continue. And I certainly saw an uptick in queries that we were getting on transition. I would say that borrower engagement is also increasing given the deadline. However, we do see a mismatch in engagement within institutions where you often have core LIBOR teams who are very much up to speed and very engaged. But those on the frontline and relationship managers, for example, may not necessarily be as engaged or up to speed. And I think the issue is the same for borrowers where LIBOR has an impact beyond just financial products and affects commercial contracts as well. So there is a need to spread knowledge more widely within institutions. And I think the other area of focus that we see for engagement is also engaging developing markets as well, where there perhaps hasn't been as much of a focus on transition.
Karen Stretch 35:45
Okay, thank you very much. I think you've kind of just part answered the next question by talking about spreading knowledge, but do you have any more views or any wider views on what can be done to increase engagement?
Kam Mahil 35:59
Yeah, I mean, I think one of the biggest challenges and I'm sure you found this as well with LIBOR transition is just breaking down the sheer amount of information that is out there and breaking through the uncertainty and the various different options that have been made available. So I think clarity of messaging is quite key, but also positive messaging as well, because I think it's really unfortunate that the recent debates in the US have clouded the fact that there has actually been a lot of certainty that has been out there and deals have being done, borrowers have been updating their system. So I think there is some real positive messaging there. So that's where I think the focus should be, really clarity and positivity of messaging and going to borrowers with a product set. And as I said before, institutions thinking about how they disseminate the knowledge internally.
Karen Stretch 36:54
And what do you see as, or what do the LMA members see as the biggest challenge to LIBOR transition in the loan market, and what do you think will help to overcome this?
Kam Mahil 37:05
Yeah, so I think at the moment members certainly see the uncertainty in the US market as probably being the biggest challenge because it is causing a delay to transition decisions on multi-currency deals because parties have been adopting a wait and see approach. And whilst what would ultimately help is a clear direction from either the US ARRC or the Fed, I don't think that will be forthcoming because it seems that there will be a range of rates that are adopted in the US domestic market with different borrowers preferring different solutions. So I don't necessarily see a one track approach emerging. As a result, I think parties in the international market really need to think through their approach to multi-currency deals and make a decision on their approach and deciding what is actually important to them, and what can they live with. And again, I would encourage parties who are doing deals to keep publicly announcing them as well, because that will help to build confidence of approaches being taken, rather than parties sort of sitting back and adopting a wait and see approach and and hoping for certainty which might not actually come.
Sarah Smith 38:17
So let's go back to the LMA's wonderful clock on its microsite countdown. What does the LMA have planned for its role in facilitating LIBOR transition for the remainder of this year? What should we expect to see? And can you share any thoughts that you have on how we might see the year unfolding?
Kam Mahil 38:39
Yeah, I think a core focus for us is on providing more documentation. So continuing to update the suite of documents that are out there to assist members with transition. I think also continuing our dialogue with different sectors of the market. So particularly in the developing markets, and export finance markets as well. And also just a key focus on continuing education, in particular, the interviews that we've been doing with market participants so that we can all continue learning from each other and hopefully continue on this journey to the end of the year.
Karen Stretch 39:14
Thank you very much, Kam. And as we draw today's session to a close, what is the LMA's key message on LIBOR transition?
Kam Mahil 39:27
So I think our key message is that transition is happening. And the tools are in place for transition and parties can and should be moving forward. Resources will certainly become scarce, the closer that we get to the end of the year, so there is a real benefit to getting ahead of the issue rather than adopting a wait-and-see approach. So we would really encourage parties to decide which rates they want to move to which rates they can actually cope with and share their experiences because we are all in this boat together, everyone having to go through LIBOR transition. I think it affects every one of us. And really we need to learn from each other in order to move forward.
Karen Stretch 40:08
Thanks, Kam. That concludes today's session. Kam, thanks again to you and the LMA team for taking the time to speak with us today and for providing the LMA's perspective. And thanks to the LMA for agreeing to join our LIBORcast series. And for those of you listening, thank you for taking the time. We hope you enjoyed this session. Do please check out our LIBORcast channel to hear other insightful discussions with market and industry leaders including regulators, trade associations and market participants about the work ahead in the LIBOR transition process.