Will Borrowers Pay for LIBOR Amendments?

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.

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Fannie Mae and Freddie Mac Deadlines are Fast Approaching

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.

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Is There Room for AMERIBOR in a SOFR Future?

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).

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A Hot Issue for a Hot Summer: Time to Understand ISDA IBOR Benchmark Fallbacks

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.

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Expansion of Main Street Lending Program by Federal Reserve

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.

Federal Reserve Updates Main Street Lending Program Guidance and Publishes Form Loan Documents

The Federal Reserve Board issued initial guidance regarding its Main Street Lending Program, as authorized under the Coronavirus Economic Stabilization Act (Title IV of the CARES Act), on April 9, 2020, which was modified and supplemented by the frequently asked questions (FAQs) published on April 30, 2020. On May 27, 2020, the Federal Reserve Bank of Boston, which the Federal Reserve System tasked with administering the Main Street Lending Program, released a further updated set of FAQs and published form documentation to assist with the documentation of each loan participation. The new guidance both modified and supplemented the previous guidance issued on the three facilities―the Main Street New Loan Facility, the Main Street Expanded Loan Facility and the Main Street Priority Loan Facility.

To read the full text of this Duane Morris Alert, please visit the firm website.

Federal Court Rules That Loans Are Not Securities

On May 22, 2020, the U.S. District Court for the Southern District of New York ruled in Kirschner v. J.P. Morgan. The court held that a syndicated term loan is not a “security” under state securities laws. Had the court found that loans are securities, such a ruling would have had profound consequences on the leveraged loan market.

To read the full text of this Duane Morris Alert, which provides a brief overview of the court’s holding and details the implications on the banking and financial services industry, please visit the firm website.

SBA Releases Interim Final Rule Regarding PPP – Lenders’ Perspective

On May 22, 2020, the United States Department of the Treasury and the U.S. Small Business Administration (SBA) released new guidance concerning the federal government’s Paycheck Protection Program (PPP) implemented under the CARES Act. The interim final rule sets forth responsibilities for both borrowers and lenders with respect to loan forgiveness review procedures and other matters. The interim final rule applies to all loans under the PPP, and, importantly, states that audits may be exercised in the SBA’s sole discretion, regardless of loan amount.

To read the full text of this Duane Morris Alert, please visit the firm website.

New Guidance Documents on Green Loan Principles and Sustainability Linked Loan Principles for a Post-COVID-19 World

While the world is currently focused on the impact of COVID-19 on the global economy, with “COVID-19 Bond” issuance easily outdistancing the current volume of green financing, it is time to consider post-COVID-19 activities. One positive effect of the pandemic is the demonstrable improvement of carbon levels and other environmental measures. So, as national governments consider measures to reopen their economies, lenders and borrowers may want to consider how best to finance the economies’ reemergence. Many hope to see an expansion in areas that stimulate growth in a more environmentally friendly manner.

To read the full text of this Duane Morris Alert, please visit the firm website.

 

New COVID-19 UK Government Financing Options Available

The UK government recently announced a package of measures to provide liquidity to UK businesses during the COVID-19 pandemic. Two schemes are particularly useful for financing needs: the HM Treasury and the Bank of England COVID-19 Corporate Financing Facility and the British Business Bank Coronavirus Business Interruption Loan Scheme.

To read the full text of this Duane Morris Alert, please visit the firm website.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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