When law firm Linklaters decided to organize a seminar about theforthcoming demise of LIBOR, it planned to holdthe event in its London auditorium, which seats about a hundredpeople. After more than 500 attendees signed up, it was forced tomove to a larger venue.

Thursday's packed attendance at the Honourable Artillery Company'sheadquarters strikes me as testament to how corporatetreasurers, bankers, accountants, and consultants are belatedlyrealizing the scale of the task finance faces in replacing what was dubbed—and still arguablyis—the world's most important interest rate. But the awakening maystill have come too late to avoid a chaotic and expensivedenouement to the benchmark.

The London interbank offered rates (LIBOR) are embeddedthroughout the DNA of finance. Untangling them, after the FinancialConduct Authority's (FCA's) announcement two years ago that they'llbe phased out by the end of 2021, is proving difficult through acombination of apathy, complexity, and a lingering hope that LIBORwill somehow limp on in some form or other.

In the worst-case scenario, the disappearance of LIBOR couldlead to the courts ruling that some existing contracts are deemedto have been frustrated. In legal terms, that happens when an eventeither makes enforcement of a contract impossible or completelyundermines the contract's original intentions. This would place themarket in largely uncharted territory—“contractual Armageddon,” inthe words of Rick Sandilands, senior counsel, Europe, at theInternational Swaps and Derivatives Association (ISDA).

The most extreme outcomes could be for the frustrated contractsto be unwound as if they never happened in the first place, or acourt trying to account for the various benefits that had accruedduring the contract's life, in order to come up with a settlementthat treated parties to the agreement fairly.

It's an unlikely, though not impossible, scenario. But many ofthe legal experts who spoke at the Linklaters conference discussedthe need for flexibility when writing or amending contracts thatrun past LIBOR's end date, because it's still not 100 percent clearwhat form the replacement interest rate will eventually take,especially given that different countries are seeking differentsolutions.

And where a lawyer sees elasticity, a hedge fund may seepotential profit. There's a non-negligible risk that where acontract change creates a winner and a loser in financial terms,litigiously minded mischief makers may try their luck.

Even without that doomsday outcome, rewriting contracts thatrefer to LIBOR is fraught with byzantine convolutions. Take, forexample, a syndicated loan that pays interest based on LIBOR and isused to finance a toll road in Spain. Changing the terms wouldprobably require the consent of the syndicate of banks thatarranged the loan, as well as the borrower, as well as theproviders of any hedging agreements undertaken, and maybe theagreement of the Spanish local authority that leased or sold theland the road is on. Now multiply that across the entire projectfinance universe to see the complexity of the shift to newbenchmark borrowing costs.

There has been some progress in persuading U.K. companies toadopt the Sterling Overnight Interbank Average rate(SONIA), the preferred replacement for LIBOR. Last month, Associated British PortsPlc switched its 65 million pounds ($81.4 million) offloating-rate notes to making interest payments tied to SONIArather than LIBOR. And last week, National Express Group Plc tookout the first SONIA-basedloan, from Royal Bank of Scotland Group Plc's NatWest unit.

While both are desirable developments in the shift to theovernight benchmark, a few deals do not a transition make.Linklaters estimates as much as $2 trillion of loans riskbeing left “in limbo” by LIBOR's demise. And while more than 40new sterling floating-notes tied to the new benchmark have beensold this year, there are billions of dollars, pounds, and yen ofoutstanding notes that still base their payments on LIBOR—as much as $864 billionworth, according to the International Capital MarketsAssociation (ICMA).

The logistical difficulty of rounding up the disparate investorsin those securities to get them to agree to change the referencebenchmark is daunting, to say the least. Moreover, even when thepaperwork contains language about what to do if LIBOR isn'tavailable, that documentation was designed for brief periods ofabsence, rather than envisaging a world without LIBOR. In manycases, the interest payments revert to a fixed rate based on thefinal LIBOR determination—again creating the prospect of legalaction from financially disadvantaged actors, legitimate orotherwise.

Edwin Schooling Latter, the FCA's director of markets, warnedlast week's conference participants that they can expect“a lot of supervisory interest” if the regulator decides customersare being gouged by members of the finance community gaming thechanges. He was adamant, meantime, that participants should come upwith market solutions to the realignment rather than relying on theregulator to intervene.

“I love deadlines,” wrote Douglas Adams, the British author ofbooks including the Hitchhikers Guide to the Galaxy. “I love the whooshingnoise they make as they go by.” With less than two and a halfyears before LIBOR's scheduled death, the explosion in the world offinance if it arrives at the deadline without more preparation thanis currently happening will be somewhat louder than a whoosh.

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