Thailand

Bank of Thailand

Background of LIBOR Cessation

Interbank Offered Rates have been widely used as a benchmark interest rate for the pricing of cash and derivatives products.

The London Interbank Offered Rate (“LIBOR”) is the most prominent interbank offered rate, and is used in a wide range of banking products globally, including loans, credit cards, bonds and derivatives. LIBOR reflects an interbank interest rate which is calculated using the interest rate submitted by participating banks. However, many factors, including the manipulation of the rate by certain participating banks around the time of the Great Financial Crisis, has led to the gradual phasing out of LIBOR.

On 5 March 2021, the Financial Conduct Authority (“FCA”) – the regulator and the supervisor of the LIBOR benchmark – announced that all LIBOR settings will either cease to be provided by the administrator or no longer be representative.

This will occur in 2 phases, i.e. (1) immediately after December 31, 2021, and (2) immediately after June 30, 2023.

After 31 December 2021, the FCA announced that (1) all euro LIBOR settings, all Swiss franc LIBOR settings, the spot next, 1-week, 2-month and 12-month Japanese yen LIBOR settings, the overnight, 1-week, 2-month and 12-month sterling LIBOR settings, and the 1-week and 2-month US dollar LIBOR settings will permanently cease, and (2) the 1-month, 3-month and 6-month Japanese yen LIBOR settings and the 1-month, 3-month and 6-month sterling LIBOR settings will cease to be provided or, subject to consultation by the FCA, be provided on a synthetic basis and no longer be representative and that representativeness will not be restored.

The rest of LIBOR settings will permanently cease immediately after June 30, 2023, i.e. the overnight and 12-month US dollar LIBOR, and no longer be representative, i.e. the 1-month, 3-month and 6-month US dollar LIBOR.

What Will Replace LIBOR?

The market appears to be heading in the direction of using near risk-free rates (“RFRs“). RFRs are based on overnight repurchase rates or overnight deposit rates. However, there are some key differences in the basis of calculating RFRs and LIBOR:

  1. Timing for obtaining the rates: LIBOR is a forward-looking rate and therefore the rate can be fixed prior to the commencement of the interest period. RFRs is a backward-looking rate and therefore the rate will be based on actual transaction data and can only be fixed after the related period (i.e. at the end of after the interest period). As such, it will be difficult to determine interest ahead of time.
  2. Element of pricing: LIBOR is based on the notion that one bank is taking credit risk on the other for the relevant tenor, and this is reflected in the quoted rate. RFRs is a risk-free rate. Therefore, assuming risk is constant, the fixed margin applied to RFRs would be higher than under LIBOR.
  3. Publication: LIBOR is published on or about 11 a.m. London time. RFRs are published at different local times.

How does LIBOR’s Cessation Impact the Thai Market?

Currently, the Thai Baht Interest Rate Fixing (THBFIX) is widely used as a reference rate for floating rate products and used for mark-to market valuation. The major component for the calculation of THBFIX is USD LIBOR. However, THBFIX will be ceased after 30 June 2023.

The Bank of Thailand (“BOT”) has established the “fallback THBFIX” as a temporary measure to be used in replacement of THBFIX. The BOT will publish the fallback THBFIX for legacy contracts until the end of 2025.

In addition, the BOT and its steering committee have established the Thai Overnight Repurchase Rate or “THOR” as a new reference rate to be applied in cash products and derivatives products. THOR is calculated and determined from the volume-weighted average of qualifying transactions in the overnight private repurchase market. BOT recommended that any transaction which is entered into after 1 July 2021 should apply THOR as a new interest rate.

We note that THOR shares the same characteristics as other RFRs, i.e. it is a backward looking rate and calculated based on actual transactions. The rate is calculated by compounding the daily overnight rates of the interest period, excluding the payment date. Thus, the interest due is only known on the last day of the interest period. This could affect the term of the repayment as a lender or a facility agent may not have sufficient time in calculating and settling interest payments. In this aspect, BOT has introduced certain mythology for application of THOR, e.g. plain method and in arrears method. The most recommended one is known as ‘5 Business Days Lookback with observation shift ‘.

The compounded THOR in this methodology will be calculated from the beginning of the interest period and end on 5 business days prior to the interest period. This would give some time for a lender or facility agent to prepare the settlement and the borrower to prepare for the payment.

Documentation – Next Steps

Contracts which now apply LIBOR or THBFIX as an applicable interest rate will be affected given that the certain reference rates will be absent after 30 June 2023.

It is recommended that the parties check whether the contracts include a fallback position in the event the applicable rate ceases, e.g.:

  • whether the existing contract has already included a “Market Disruption” provision to be applied in the event of absence or cessation of the interest rate and whether it captures the event of LIBOR cessation
  • what rate shall the parties apply if Market Disruption occurs
  • how long will that rate be applicable
  • the steps the parties need to take in order to find an alternative rate

In addition, for contracts that will be entered into before June 2023, or those existing long term contracts which will continue for many years after the cessation of LIBOR, it is recommended that the parties should start discussing the effect of applying RFRs (or THOR) in place of LIBOR (or THBFIX).

Finding a clear position on how to mitigate all risks from such change may take some time. In the meantime, it is advisable that the parties should include the fall back provision in the contracts by adding:

  • clear trigger events, i.e. the definition of the Screen Rate Replacement Event as recommended by LMA/APLMA
  • the waterfall steps to occur when the new rate is selected, i.e. THOR and its methodology in applying THOR
  • spread adjustment waterfall that will make the new rate similar to LIBOR
  • ability to make conforming changes

It is worth noting that the parties may incur costs and expenses in amending existing contracts and therefore the parties need to check the terms under the contracts who shall be responsible for costs in this case. For costefficiency, in order to determine whether the contract should be amended, several factors including remaining term loan, taxes and fees should be taken into account.


For more information and queries on the bidding submission, please contact the key contact person(s).

 

Jessada Sawatdipong

 

 

 

 

 

 

 

Jessada Sawatdipong

TEL+66-2-009-5000 Ext. 3102

jessada.s@mhm-global.com

V. Joseph Tisuthiwongse

 

 

 

 

 

 

 

V. Joseph Tisuthiwongse

TEL+66-2-009-5000 Ext. 3109

joseph.t@mhm-global.com

Tip-apa Limvichai

 

 

 

 

 

 

 

Tip-apa Limvichai

TEL +66-2-009-5000 Ext. 3109

tip-apa.l@mhm-global.com

Varisa Soonyakanit

 

 

 

 

 

 

 

Varisa Soonyakanit

TEL +66-2-009-5000 Ext. 3105

varisa.s@mhm-global.com

Chandler MHM

Chandler MHM Limited
36th Floors Sathorn Square Office Tower 98 North Sathorn Road Silom, Bangrak, Bangkok 10500, Thailand
chandlermhm.com

Related Articles by Firm
New regulation on the prohibition of sales of alcoholic beverages online
In line with evolving trends in technology, certain entrepreneurs and retailers have started using online channels to sell alcoholic beverages, which makes it difficult to ensure the sale of such beverages is in accordance with existing laws ...
Nok Air Rehabilitation Proceedings – Updates for Creditors and Lessors
As the global travel industry continues to grapple with the effects of COVID-19, many companies are now beginning to seek protections under various insolvency regimes ...
Thai data privacy act exemptions
A cabinet resolution has approved a draft Royal Decree on temporary exemption of PDPA enforcement for some organisations and businesses.
Procurement of power from community-based power projects
These projects are intended to help generate and distribute income to local communities and promote their participation in local power projects.
Updated standards for e-meeting security
The Emergency Decree requires that electronic meetings follow the security protocols set forth under a notification from the Ministry of Information and Communication Technology.
Waste to energy projects in Thailand
A brief overview of the legal issues related to the development of a municipal solid waste to energy project.
Scrutinising CP Group’s acquisition of Tesco
The decision of Thailand’s competition authorities will set a precedent regarding merger control and provide clarity on market definitions.
PPP projects in Thailand’s EEC
Thailand will continue to aggressively move forward with legislation that streamlines implementation of important PPP projects. This legislative trend presents new opportunities for foreign and local investors alike, with a focus particularly in Thailand’s infrastructure sector ...
Community-based power projects in Thailand
A feed-in tariff scheme for power generated by community-based projects has been approved.
Thailand Plus incentives under BOI
The two new incentives encourage companies to move from overseas to Thailand.
Thailand’s OTCC issues first industry-specific conduct guidelines
Guidelines on the conduct between wholesale and retail business operators and their trade partners announced by the Office of Trade Competition Commission.
Amendment to the Consumer Protection Act 
The Act strengthens the law relating to the safety of products and services.
Personal Data Protection Act published in the Government Gazette
Business operators should ensure that their businesses comply with the PDPA.
Amendment to Thai Arbitration Act
The Amendment expands the ability of foreign arbitrators and representatives to act in arbitral proceedings.
Update on Stamp Duty regulating electronic transactions
A new notification requires parties who enter certain electronic transactions to pay stamp duty in cash.
Ministerial Regulation removing back office services from the Foreign Business Operations Act announced
Certain back office service businesses will no longer require a foreign business licence.
Developments in Thai M&A
Corrupt practices, environmental breaches and merger filing are becoming more significant priorities for clients ...
Thailand: Projects and Energy
Commentary on the latest developments in the Thai projects and energy sector ...
Secondary laws under the Trade Competition Act BE 2560
The enactment of these five Notifications represents a significant leap of progress.
Thailand Update: Amendment to Work Permit Law
In response to criticism, the government decided to amend the Emergency Decree on Managing of Foreigners with relaxed penalties ...
Leasing of residential buildings − A contract-controlled business
The Contract Committee of The Consumer Protection Board recently announced a new Notification which designates the lease of residential property as a “contract-controlled business”.
New Mining Regulations for Thailand
On 30th January 2018, the Ministry of Industry issued a new notification regarding prohibited actions for foreigners ...
Mergers and acquisitions in Thailand
A number of factors are making Thailand a target of choice for international and regional investment ...
Thailand Anti-Corruption Update
National Anti-Corruption Commission Guidelines to Supplement Section 123/5 of the Organic Act on Counter Corruption ...
Amendment to the Thai Civil and Commercial Code
Part IX: Combination of Limited Companies ...
Thailand: Amendment to the Public Company Act
The National Council for Peace and Order has considered the lack of clarity on conditions, procedures and time limitations related to the laws governing business operations ...
Thailand: The Act on the Amendment to the Civil Procedure Code (No. 30) B.E. 2560 (2017)
There are a number of amendments to the current Civil Procedure Code (CPC) as part of its legal execution ...
Projects & Energy Special Report: Thailand: New Minerals Act
A new Minerals Act (BE 2560 (2017) was published on March 2, 2017 and took effect on August 30, 2017 (180 days after the publication date) ...
Thailand: ERC Announcement - Purchase of Electricity From Hybrid-Renewable Energy Small Power Producers
The Energy Regulatory Commission (ERC) issued an invitation to bid for the sale of electricity from Hybrid-Renewable Energy Small Power Producers (SPP) on 4 August 2017 ...
Thailand: New Amendment to the Labor Law
The Labor Protection Act B.E. 2541 (“LPA”) was first enacted in February 1998; the LPA has been amended several times ...
Thailand: Extension of the Reduced VAT Rate
Value added tax (VAT) is an indirect, non-cumulative, consumption tax levied on the supply of goods or provision of services in Thailand ...
Thailand: Ten year visa extension
Due to the rapidly increasing number of foreign senior-citizens seeking Thailand as a retirement destination, Thailand’s Cabinet recently approved the ten-year retirement visa extension ...
Thailand: The New Trade Competition Act
On 24 March 2017, the National Legislative Assembly (the “NLA”) in Thailand passed the final reading of the draft Trade Competition Act ...
Thailand: Amendment to BOI Act to create new BOI benefits
The Thai government has recently been promoting “Thailand 4.0”, which refers to creative and innovative industries ... as a master plan to pull Thailand out of the middle-income trap and toward becoming a high-income country ...
Energising Thailand’s M&A sector
With a focus on the energy and natural resources sector, Chandler & Thong-ek Partner Ratana Poonsombudlert answers our questions on Thailand’s M&A present and future
Related Articles
Related Articles by Jurisdiction
Full steam ahead in the Mekong Region: a look at projects in the pipeline
In this month's edition of ASIAN-MENA COUNSEL, we provide you with a Mekong Region Update. Industry experts from Gide Loyrette Nouel offer up a comprehensive overview on the current status of infrastructure in these largely underdeveloped countries bound ...
Thailand: The Act on the Amendment to the Civil Procedure Code (No. 30) B.E. 2560 (2017)
There are a number of amendments to the current Civil Procedure Code (CPC) as part of its legal execution ...
Thailand: Amendment to the Public Company Act
The National Council for Peace and Order has considered the lack of clarity on conditions, procedures and time limitations related to the laws governing business operations ...
Latest Articles