Duane Morris LIBOR Transition Team leader Roger Chari recently published an article with Thompson Reuters Practical Law. He addressed several crucial questions that borrowers might have and gave some insight on navigating the options that are available as the end of LIBOR looms.
By Anastasia N. Kaup and Melissa A. Sharp
It is critically important, for both lenders and borrowers, to confirm that the borrower is actually authorized to enter into a financing transaction, borrow money, and pledge assets as security for those obligations (if the financing is secured). If a borrower (entity) acts without express legal authority or beyond the stated scope of authority in its charter, operating agreement, or offering documents (collectively, the “Fund Documents”), the entity may be sued by its investors, the transaction may be voided by a court, the lender may suffer a loss, and/or other negative consequences may result. Continue reading “Best Practices for Fund Document Diligence in Fund Financing Transactions”
On March 24, 2021, the New York Legislature passed Senate Bill 297B/Assembly Bill 164B, intended to reduce risks associated with the transition away from U.S. dollar (USD) LIBOR. The text of the legislation was initially presented by the ARRC last year. On April 6, 2021, New York Governor Andrew Cuomo signed the bill into law. The New York law has become the first legislative action relating to LIBOR transition and may serve as a model legislation for other states to follow.
While the UK Financial Conduct Authority, LIBOR’s regulator and administrator, confirmed that it would cease publication of representative USD LIBOR for the major USD LIBOR settings in mid-2023, which helps address a substantial portion of legacy contracts, there will be a significant number contracts that mature after mid-2023 and contracts that have no effective means to replace LIBOR upon its cessation. The New York legislation addresses those contracts without effective fallbacks that are governed by New York state law. It is expected to provide legal clarity for many New York financial products and agreements referencing USD LIBOR, reduce potential disputes surrounding the transition and lessen the burden on New York courts. Read on to see how our Alert, published today to learn more about the legislation!
The Consumer Financial Protection Bureau has issued its final rule implementing the Fair Debt Collection Practices Act by making revisions to Regulation F, 12 CFR part 1006.
Read about the first part of the rule, released on October 30, 2020.
Read about the second part of the rule, released on December 18, 2020.
As we noted in our prior blog post over the summer, the IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement for interest rate derivatives to be published by the International Swaps and Derivatives Association (ISDA) has been on hold while ISDA waits for a positive business review letter from the US Department of Justice (DOJ). This past Friday, ISDA issued a press release that it received the letter from the DOJ on October 1, 2020.
The DOJ letter does not foreclose the possibility that other regulators in Australia, Canada, the European Union and other jurisdictions may raise their own objections. However, the Board of Directors of ISDA has determined that it will release the Supplement and Protocol on Friday, October 23, 2020, and the Supplement and Protocol will take effect approximately three months later on Monday, January 25, 2021. The draft Supplement and draft Protocol have been posted for review, together with a FAQ, sample adoption amendments and descriptive outline.
In a consensual lending world, a commercial borrower is usually obligated to pay for a lender’s expenses relating to a loan. Depending on the loan agreement, the borrower might agree to pay closing costs, enforcement costs if the loan goes bad, and fees and expenses for amending the loan agreement. Even if a loan agreement is silent, a borrower may find that the lender is unwilling to amend the agreement unless the borrower pays the costs. Regardless of the language or lack thereof, whether a lender can and should impose such costs may be an open question.
If the borrower is asking for an amendment, then it only seems fair that the borrower pay for the lender’s amendment costs if requested. In a committed loan, it is unusual for a lender to ask for an amendment that the borrower doesn’t also want―but if it does, it doesn’t seem fair for the borrower to have to pay the lender’s costs.
As two of the largest participants in the lending market, Fannie Mae and Freddie Mac (the “GSEs”) are busy preparing for the transition away from LIBOR. Both GSEs have established milestones for beginning acquisition and issuance of SOFR-indexed products and ceasing LIBOR-indexed products. Below are reminders of important deadlines:
Single-Family (“SF”) ARMs and Securities:
|August 3, 2020||Fannie Mae began accepting delivery of SOFR-indexed ARMs.|
|September 30, 2020||LIBOR applications end. All LIBOR loans must have Application Received Date on or before this date.|
|November 16, 2020||Freddie Mac will begin accepting delivery of SOFR-indexed ARMs.|
|December 1, 2020||This the last MBS/Guarantor PC issue date for LIBOR-indexed ARM pools.|
|December 31, 2020||This is the last date for cash/whole loan purchase of LIBOR-indexed ARMs.|
With the phase out of LIBOR just over a year away and the ARRC having identified the Secured Overnight Financing Rate (SOFR) as its preferred replacement for US dollar loans, it appears that the market has the guidance it needs to make the transition.
Not so fast, say some Main Street banks. SOFR may work for much of the loan market and particularly larger banks that can borrow on a secured basis. However, this does not represent the reality for many smaller and regional banks, which often can borrow only on an unsecured basis. Using SOFR can lead to a mismatch between the borrowing risk that such banks take and the interest they can earn on their loans.
What are such banks to do? Some of them have voiced their support for an alternative LIBOR replacement rate―the American Interbank Offered Rate (AMERIBOR).
As we patiently wait for the International Swaps and Derivatives Association (ISDA) to publish its long planned IBOR Fallback Protocol and IBOR Fallback Supplement for interest rate derivatives, we thought we would highlight some recent announcements on the topic.
According to ISDA’s letter on July 22, 2020 to the Alternative Reference Rates Committee (ARRC), ISDA planned to finalize the Protocol and the Supplement by the end of July. On July 29, 2020, ISDA announced that it would publish the Protocol “soon”. This is hardly the first time that things have been delayed, but it’s important to get it right. Among other things, it’s possible that ISDA is still waiting for a positive business review letter from the US Department of Justice and similar feedback from competition authorities in other jurisdictions.
On June 8, 2020, the Federal Reserve made significant additional changes to the terms of the Main Street Lending Program, aimed at making the program more attractive to small- and mid-sized businesses and to lenders. Changes include decreased minimum loan amounts, increased maximum loan sizes, extended loan terms and deferred principal repayments, among others.
To read the full text of this Duane Morris Alert, please visit the firm website.