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The LIBOR Phase-Out:  Part 3
By Anand A. Acharya on August 6, 2019

In Parts 1 and 2 of this series, we discussed the circumstances that led to the planned phase-out of the London Inter-bank Offered Rate, commonly referred to as “LIBOR” and the proposed replacement rate known as the Secured Overnight Financing Rate (“SOFR”). In this last part of the series, we will present the proposed language recommended by the Alternative Reference Rate Committee (“ARRC”) to be used in new contracts that reference LIBOR.

The imminent cessation of LIBOR as a functioning benchmark rate is a pervasive development on the horizon. Despite rumors that there is a remaining runway of approximately two and a half years before LIBOR goes dark, regulators are pleading with lenders to begin preparations for the shift to SOFR with a sense of urgency. Preparations should include (a) assessing exposure and contract inventory, (b) reviewing contract terms that utilized LIBOR, (c) preparing to renegotiate affected contracts, and (d) beginning to ease the transition away from LIBOR by adopting “fallback language.”

ARRC has offered lenders guidance with regard to fallback language. This language can be incorporated into agreements that still reference LIBOR as a means to prevent avoidance of the contracts in the event LIBOR is no longer usable at a date subsequent to contract execution. Such language, which is available on the New York Federal Reserve Board’s website, is arranged by product types (i.e., bilateral business loans, floating rate notes, securitizations, and syndicated loans). For each of these products, ARRC offers lenders language that can be categorized into one of two primary approaches: (a) the hardwired approach or (b) the amendment approach.

The hardwired approach allows lenders to definitively dictate the replacement rate and spread in the event LIBOR is no longer available during the term of a contract. It offers clarity on the transition to the new rate, including the triggers that would cause the replacement rate to become effective. However, such an approach may prove tricky given that lenders need to ascertain the spread that will be necessary to keep the transition to a new rate consistent with the current LIBOR. On the other hand, the amendment approach leaves open the possibility of which replacement rate and spread will be used and instead calls for streamlined negotiation if certain trigger events occur. The benefit of the amendment approach to lenders is that it provides a means to renegotiating the product while preventing the lender from being bound to a replacement rate and spread that cannot yet be ascertained.

Lenders should undertake preparations for the end of LIBOR in earnest as soon as possible. Utilizing the contractual language offered by ARRC in all LIBOR-based products is a necessary first step in doing so. Parker McCay’s Corporate Department has counseled a wide array of lenders in the best practices when it comes to loan documentation. Please feel free to contact any of the attorneys in the Corporate Department to discuss how we can assist you with this matter.

The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.

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