On the way to changes in interest rates on the credit market

On January 28, 2021, the Loan Market Association published draft exposé of its recommended forms of term sheets and facility agreements for multi-currency risk-free and interbank term loans. This is an important step as 2021 will be the year the credit market begins the process of moving from “forward looking” interbank rates to “backward looking” risk free rates.

Multinational corporations based in Ireland and other parts of the Eurozone generally need access to loan finance denominated in euros alongside other major currencies such as pounds sterling and US dollars. In 2021, however, this is likely to be made more difficult by the fact that the interest rate reform is progressing at different speeds for different currencies. Regulators have stated that there should be no new GBP LIBOR loans from the second quarter of 2021 and no new USD LIBOR loans from 2021, while EURIBOR is expected to be used for an extended period due to its revised “hybrid” methodology “was declared to meet the requirements of the EU benchmark regulation.

These draft documents should enable multinationals to address this multi-pronged reform process by providing mechanisms for:

  • USD, GBP and / or CHF loans with interest calculated with reference to the applicable “backward-looking” risk-free interest rates (SOFR, SONIA or SARON); as well as
  • Loans denominated in euros and other currencies that bear interest with reference to “forward-looking” interbank rates such as EURIBOR.

The documents also take into account the likely cessation of EURIBOR in the coming years by incorporating a “rate switch” mechanism that enables conversion to an interest rate based on the risk-free € STR interest rate if a prearranged trigger event occurs earlier occurs in relation to the EURIBOR or a previously agreed backstop date. The mechanisms of the EURIBOR / € STR exchange rate are expected to be further updated as soon as the working group on risk-free euro interest rates publishes its recommendations on EURIBOR fallback measures in the coming months.


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