The phrase “Lehman fallout” has become almost white noise in the financial world.  Everything and anything has been attributed to the demise of the onetime banking giant.  At the risk of sounding cliché, everything has indeed changed because of the collapse of Lehman.  Apart from the obvious, the failure of Lehman has opened the floodgates to all kinds of scrutiny and the banks have quite understandably reacted to this new regime of regulation and compliance.

The latest long and drawn out aftershock of 15 September 2008 is the calculation of LIBOR in the event that LIBOR is not available.  In the not too distant past, this was dealt with by providing that reference banks be contacted to supply the missing rates.  In the wake of the LIBOR scandal brought on by heightened market scrutiny, banks are now reluctant to supply such rates.  Some have even gone as far as to institute a policy against the provision of such rates.  What happens then going forward?  What then of existing deals?

The LMA has come up with a formulation for interpolation in the event that LIBOR is unobtainable the usual way.  The LMA is widely recognised and respected.  In many ways, it is the standard setter for many aspects of finance within the UK.  So while most banks have adopted this interpolation language within the UK – the question of financial documents across the Atlantic and elsewhere remains unanswered.

Many US banks will still be inserting the old reference bank language in their documents.  Indeed, few will be familiar with the fact that many banks within the UK are now unwilling to be reference banks – not to mention the tonne of legacy deals that still contain this language within the US loan space.

Heaven forbid that LIBOR should ever be unobtainable because for many deals, agents could find themselves unable to obtain a rate.  The transaction documents would oblige them to contact reference banks but when reference banks are contacted, they will be either unable or unwilling to supply a rate.  This could leave agents in a rather unwitting but dicey position indeed.

Given that the tremors of the aftermath of the Lehman effect can still be felt, all of the participants in the market should really consider what to do in the event of a LIBOR fallout.  Lenders and agents will need to get together to decide what language would be acceptable to both parties.  If the doomsday scenario should ever arise, all involved will be damaged by the stalemate.  The deal would be at an impasse and agents will be lumbered with the impossibility of obtaining a rate from reference banks who are unable or unwilling to provide one.

Let’s deal with this now.  Crossing the bridge when we get to it may not be the best way forward.