Libor-Related Loan Modifications Are Not ‘New Debt’ For Sanctions Purposes, U.S. Says

The U.S. Federal Reserve. (Source: Adobe Stock)

By Samuel Rubenfeld

Friday, January 7, 2022


The U.S. Treasury Department said Friday it will not treat loan modifications made due to the end of the London interbank offered rate (Libor) as “new debt” for sanctions purposes.

Libor, a key benchmark interest rate at which banks lent to each other, has begun a phase-out following a rate-rigging scandal in which traders were able to move it up or down by submitting false data. The U.K. Financial Conduct Authority (FCA) announced the transition in 2017.

Due to the cessation of Libor, the Treasury’s Office of Foreign Assets Control (OFAC) decided to issue additional guidance about the debt restrictions in some of its sanctions programs, according to a frequently asked question (FAQ) document. 

“Loans, contracts or other agreements that use Libor as a reference rate that are modified to replace [the] benchmark reference rate will not be treated as new debt for OFAC sanctions purposes, so long as no other material terms of the loan, contract or agreement are modified,” the FAQ said.

Libor had underpinned trillions of dollars in commercial debt and was also the basis for consumer loans around the world. The first phase-out began Dec. 31, 2021 and the U.K. regulator explained the changes this week, noting which rate-settings have ended and how the others that remain will be handled for now. The benchmark rate will fully terminate June 30, 2023. 

U.S. regulators have been explaining to banks and non-financial companies what the transition would look like, and guiding along alternative benchmarks. Some are more prepared than others, however, The Wall Street Journal reported in December. And several companies tried to lock in last-minute deals with banks before the initial change-over, the newspaper reported. 

U.S. sanctions targeting Belarus, Venezuela, and Russia and Ukraine prohibit Americans from dealing in certain types of new debt, including loans, bonds or extensions of credit, with companies identified as subject to the restrictions, the FAQ said. The exact entities, restrictions and debt maturities subject to the prohibitions are specific to each sanctions program.

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