GFOA Advisories identify specific policies and procedures necessary to minimize a government's exposure to potential loss in connection with its financial management activities. It is not to be interpreted as GFOA sanctioning the underlying activity that gives rise to the exposure.
The London Interbank Offered Rate (LIBOR) is a widely used rate for floating rate financial contracts. State and local governments often see this rate in bank loans, floating rate notes, lease contracts, direct placements, and other types of financings and credit enhancements, as well as swap/derivative products intertwined with municipal debt.
Due to various scandals involving LIBOR manipulation, the Financial Conduct Authority (FCA), which regulates LIBOR, announced in July 2017 that banks would no longer be required to submit information for the calculation of LIBOR after December 31, 2021, effectively discontinuing LIBOR as of that date ( “Cessation Date”). In response, the Federal Reserve Board and the New York Federal Reserve Bank convened the Alternative Reference Rates Committee (ARRC) to develop a more robust reference rate as a replacement for US Dollar based LIBOR. They recommended the Secured Overnight Financing Rate (SOFR) as an alternative to LIBOR. LIBOR replacement, or “fallback language”, has been developed by ARRC for most financial contracts and the International Swaps and Derivatives Association (ISDA) for derivative contracts, which may be adopted by municipal issuers to amend their respective contracts. Municipal issuers with legacy contracts tied to LIBOR are encouraged to consider adopting LIBOR replacement or fallback language.
On November 30, 2020, Intercontinental Exchange, Inc. (ICE) announced that the ICE Benchmark Administration (IBA), the administrator of LIBOR, would “consult” (ask for comments) on its proposal to continue the publication of certain tenors (maturities) of US Dollar based LIBOR through June 30, 2023.
GFOA recommends that governments start planning for the phase out of LIBOR despite the ICE announcement that certain LIBOR tenors may continue to be published past the December 31, 2021 Cessation Date. Steps include identifying LIBOR exposure in contracts; consulting with municipal/swap advisors and bond counsel; determining whether, and obtaining, governing body approval to amend any contracts with LIBOR references; and determining whether changes in those contracts may trigger any disclosure and/or accounting reporting requirements. GFOA encourages governments not to enter into new contracts that reference LIBOR especially if the contract extends past the expected LIBOR Cessation Date.
Governments who think they may have contracts with LIBOR references should do the following:
- Identify and document LIBOR Exposure. Review existing contracts to identify contract terms and the government’s exposure to LIBOR.
- These financial products may include bank loans, purchasing cards, floating rate notes, direct placements, lines of credit, lease contracts, etc. Other financial products may include swaps/derivatives related to municipal debt.
- Governments may also have investments that are tied to LIBOR rates.
- Governments are encouraged to understand and immediately develop a plan to address LIBOR in existing contracts despite the IBA proposing the extension of the phase out deadline for the overnight, 1-month, 3-month, 6 month and 12-month LIBOR tenors until mid-2023.
- Consult with your municipal advisor, swap advisor, investment advisor and bond counsel to discuss options on how to address your LIBOR exposure. This includes discussions with bond counsel on options that may or may not cause a “deemed reissuance” of the financing by the IRS, and the implications of a “reissuance”.
- Evaluate restructuring or refunding debt obligations that utilize LIBOR as a reference rate. Discuss options, including associated costs and risks, with your municipal advisor.
- Determine whether you may need authorization to amend existing contracts. Governments may potentially need approval from their governing body to authorize amendments to existing contracts to use an alternative reference rate instead of LIBOR. Given the anticipated timeline for cessation, governments should anticipate the requisite amount of time for governing body review and approval.
- Determine whether contract changes may trigger additional disclosure requirements. Discuss with bond and/or disclosure counsel whether the contract changes require an event notice filing under existing bond continuing disclosure agreements, or whether the entity should submit a voluntary disclosure filing in EMMA regarding contracts changes or other actions that result from the replacement of LIBOR.
- Identify any accounting matters, such as GASB 53 and GASB 93, which need to be addressed when making changes to a contract. Governments should address these and other accounting and financial reporting implications that result from amending existing contracts or the replacement of LIBOR with a new reference rate.
- Governments are encouraged not to enter into new contracts that reference LIBOR especially if the contract extends past the expected LIBOR Cessation Date. If there are no alternatives, any new contracts expiring after the expected LIBOR Cessation Date should have robust fallback language that includes a clearly defined alternative reference rate to be useful after LIBOR’s discontinuation. The ISDA and ARRC model fallback languages are recommended. Note: Optional extension and term-out periods should be considered when determining whether a contract extends past the Cessation Date.
- Linkages to industry workgroup publications (e.g., Hunt for LIBOR)
- ISDA and ARRC Model documents
- Board approval date: Friday, March 5, 2021