For LIBOR Transition Procrastinators, SOFR Starter Kit to the Rescue!

LIBOR is going away.  It was a distant pronouncement in 2017, and many thought it wouldn’t happen, or would get delayed.  But it’s coming.  Soon.  December 31, 2021 may still seem a long way off, but there’s a lot to do between now and then.  Market participants may be forgiven for concentrating on the global pandemic the last few months, but regulators in many arenas have stepped up their efforts in the past month to get the word out on LIBOR transition and get everyone moving forward on the right track.

Following its Summer Series on LIBOR transition, on August 7, 2020, the Alternative Reference Rates Committee of the New York Fed published the SOFR Starter Kit, a set of factsheets to inform the public about the transition away from USD LIBOR to SOFR. The SOFR Starter Kit is intended to ensure market readiness for the transition and help participants in markets using USD LIBOR to quickly familiarize themselves with the background information of, and main issues related to, the transition. The SOFR Starter Kit has three parts:

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Hardwired for a Smoother LIBOR Transition?

The London Interbank Offered Rate (LIBOR), which has served as a reference rate for approximately $350 trillion of debt and derivatives, will be phased out after December 31, 2021. In the United States, the Alternative Reference Rates Committee (ARRC), convened by the Federal Reserve Board and the New York Fed, has been tasked with ensuring a successful transition from USD LIBOR to a more robust reference rate. In June 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) as its recommended alternative to USD LIBOR. In April 2019, the ARRC first published recommended fallback language for syndicated business loans. At the time, the recommendations provided two approaches: an “amendment approach”―which delays all decisions about the successor rate and adjustment until a future date―and a “hardwired approach”―which hardwires the priority of replacement rates to be selected into the credit agreement upon origination based on what replacement rates are available at the time of replacement and provides for an easier amendment of related terms.

The syndicated lending market has largely adopted the amendment approach so far. In June 2020, however, the ARRC released refreshed recommendations regarding fallback language for U.S. dollar-denominated syndicated business loans that reference LIBOR. Unlike the April 2019 recommendations, the June 2020 recommendations provide only for hardwired fallback provisions. Read on to see how our Alert, published today, can help you discern the differences between the hardwired approach and the amendment approach and determine which works best for you.

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