Phaseout of LIBOR: Navigating the Final Stages, Implementing Alternative Reference Rates, and Fallback Language

Description

On Mar. 5, 2021, the regulator and administrator of LIBOR confirmed the end dates for transition away from LIBOR. For most U.S. dollar LIBOR tenors, the final date will be June 30, 2023. Accordingly, real estate and finance counsel must contemplate the transition when drafting loan documents and reviewing or amending existing loan documents.

The ARRC has proposed to replace U.S. dollar LIBOR with the Secured Overnight Financing Rate (SOFR). The Federal Reserve Bank of New York (N.Y. Fed) has published overnight SOFR rates since April 2018, and in March 2020 began publishing compounded averages of SOFR over rolling 30-day, 90-day, and 180-day periods (the SOFR Averages), to better define the calculation of SOFR.

The ARRC has suggested two basic approaches to LIBOR fallback language: a "hardwired approach," which explicitly refers to a "waterfall" of SOFR variations, and an "amendment approach," which provides greater flexibility to establish fallbacks based on market conventions when LIBOR ceases to be published. On Mar. 25, 2021, ARRC released supplemental recommendations for its hardwired language, greatly simplifying the language given the certainty provided by the March 5 announcements.

Regulators have emphasized that SOFR is not required and that banks are free to explore alternatives. Some lenders continue to seek a reference rate that reflects the cost of unsecured borrowing (known as a credit-sensitive rate), to more closely approximate their funding costs. As a result, the Loan Syndications & Trading Association (LSTA) has developed a credit-sensitive waterfall of options that lenders can use in their fallback language instead of SOFR.

Counsel should review LIBOR-based loan documents with a term beyond 2021 and discuss the alternatives with their clients (borrowers and lenders). Once the borrower and lender have reached a business decision as to the alternative rate, counsel should incorporate appropriate fallback language, including appropriate triggers for switching to an alternative reference rate and the mechanics for how an alternative reference rate and related spread adjustment will be chosen.

Listen as our authoritative panel discusses the impact of the phaseout of LIBOR and the use of SOFR or other indices as substitute rates and examines options for approaching the coming change. Finally, the panel will explain the effect of the LIBOR transition legislation recently passed in New York. The discussion also will touch on a proposed federal law, and how that would bring even more certainty to what will happen to "tough legacy contracts."