Just one in ten (11%) derivatives users from across the private equity, real estate and infrastructure sectors believe that their Libor-referencing contracts contain provisions that are appropriate for the benchmark’s permanent discontinuation. The survey* also found that half (49%) of respondents think their contracts do not incorporate appropriate fallback language and 40% said they didn’t know.
The survey was conducted by JCRA, an independent financial risk advisory, at an event it hosted alongside global law firm, Norton Rose Fulbright. 85% of the attending derivatives users had Libor-referencing contracts with termination dates beyond the end of 2021.
Furthermore, JCRA’s survey revealed that nearly two-in-five (38%) respondents described their progress in renegotiating contracts to accommodate Libor’s discontinuation as ‘not having started’. A quarter (26%) said it was a ‘work in progress’ while 23% have not yet identified which contracts require amendment. No respondents at the event had completed their renegotiations.
When asked whose responsibility it was to identify contracts that may be impacted by Libor’s discontinuation, over half (58%) thought it lay with both the lender and the borrower. Three in ten (31%) believed it was the lender’s sole responsibility, and just 8% said it was the borrower’s.
Commenting on the results of the survey, Joshua Roberts, JCRA’s lead adviser on benchmark reform, said: “The research highlights the scale of the renegotiation of contracts required in the near future. There is a danger that this will give rise to a significant capacity problem as the 2021 deadline approaches. Firms will want to ensure that they have taken appropriate advice to understand the options that are available when amending contractual arrangements.
“We would suggest that, as the clocks ticks down, firms that do not know whether they have contracts referencing Libor should carry out a full review to identify their exposure. It is concerning to see how few renegotiations have actually taken place; firms should do this in a way that at the very least minimises value transfer. We recommend that firms should look to benchmark the renegotiation to minimise their risk and fully understand any value transfer that could occur.”
Davide Barzilai, Partner at Norton Rose Fulbright, added: “The direct link between significant parts of the debt and derivative markets means that a smooth transition for the legacy book is all the more important. Having advisers on board who understand the issues across different markets and jurisdictions will make this transition much easier. With a thorough understanding of institutional structures and the available technology, projects are much more likely to be successful.”
*Survey conducted at an event hosted by JCRA and Norton Rose with 71 guests from across the private equity, real estate and infrastructure sectors.