LIBOR Transition: Term SOFR Expected “Days” After July 26

June 8, 2021, was an eventful day in the LIBOR transition. That morning, the Interest Rate Benchmark Reform Subcommittee of the Market Risk Advisory Committee (MRAC) of the Commodity Futures Trading Commission (CFTC) announced its recommendation that starting July 26, 2021, interdealer brokers should replace trading of LIBOR linear swaps with trading of SOFR linear swaps. That same morning, the Alternative Reference Rates Committee of the New York Federal Reserve (ARRC) praised the MRAC recommendation and announced that once the switch occurs, it will be in a position to recommend CME SOFR term rates “very shortly thereafter.” June 8 also happened to be the date of the ARRC’s planned SOFR Symposium. Regulatory speakers at the symposium were confident that the July 26 date for the switch was realistic and achievable. ARRC Chair Tom Wipf clarified that he expects “very shortly thereafter” to mean “days, not weeks.”

It’s a stunning reversal in what otherwise appeared to be a dim future for Term SOFR just a few months ago. Read on our Alert, published today, to learn more about the recent developments relating to Term SOFR and its competing rates.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: BSBY Out of the Gates First

With all the regulator and market focus on SOFR as the LIBOR replacement of choice, it’s easy to forget that there are other replacement rates vying for market attention. We’ve written about Ameribor and highlighted some of the recent developments in its adoption. For the most part, support for Ameribor has come from smaller Main Street banks looking for a credit-sensitive rate that more closely matches the unsecured basis on which they borrow funds.

On October 15, 2020, Bloomberg threw its hat into the ring with its Bloomberg Short Term Bank Yield Index (BSBY). After a couple of months of publishing the rate on an indicative basis, Bloomberg launched the rate on January 20, 2021, and announced in early March that the rate is available for use as a replacement benchmark rate. Read on our recently published Alert to learn more about BSBY and recent developments relating to the rate.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: Term SOFR Coming “Soon”

After the ARRC announced a week before the Memorial Day weekend that market participants can plan on a recommendation of CME Group as the administrator of a term SOFR reference rate “soon”,  it is a bit optimistic to expect that we would return from the holiday to a formal announcement on Term SOFR. Nonetheless, it is an encouraging development in what has been a rollercoaster ride on the fate of Term SOFR. In March of this year, it seemed as though Term SOFR might not come until 2022, with some dire predictions that it might not ever truly develop.

Exactly what “plans” market participants should make is still an open question. Based on developments earlier this year and the ARRC’s March announcement, some lenders are well on their way to originating daily SOFR loans even though they may have preferred to use Term SOFR. Term SOFR still is not here yet, and it remains to be seen what limitations regulators and the ARRC may put on it. In that regard, the ARRC’s key principle that Term SOFR should have a “limited scope of use” may cause some lenders to remain cautious. To hear company-side organizations, borrowers are all in favor of SOFR, including Term SOFR, if only they could find lenders willing to make SOFR loans at this point.

Our recent Alert explores some of the practical considerations surrounding the ARRC’s announcement.

 

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo, and Han Wang.

LIBOR Transition: Hardwired Language Rewired

Last week was quite eventful in the world of LIBOR transition, from the ARRC’s SOFR Symposium, to the passage of LIBOR transition legislation in New York for tough legacy contracts, to the release of supplemental fallback language for syndicated and bilateral loans. The hardwired language has come a long way- the original version was barely used, but the update last summer has achieved broad adoption in new and amended loans. What does the latest iteration have to offer, and is it worth adopting at this point?

Compared to the various versions of amendment approach language that have evolved in the market, the hardwired approach offers parties more certainty as to what the replacement benchmark will look like. The details that remain tend to be more administrative in nature and are hopefully less prone to disputes. That said, the 2020 hardwired language is hardly simple or easy to understand. Many of the details, such as the end date for LIBOR, the availability of SOFR and the spread adjustment, remained unresolved when the language came out. This necessitated drafting in the alternative and using broad descriptive language to cover concepts that would develop in the future.

Fast forward eight months to the March 5, 2020 announcements of the FCA and the IBA, and clarity on those and certain other details is now here. Rather than saying that LIBOR will one day be phased out, the date is fixed. Although Term SOFR is still a question mark, daily simple SOFR is operational now, so there is no need for loan parties to fumble around trying to figure out what the replacement rate should be. The formal announcement of the end of LIBOR also set the market-agreed calculation of the SOFR spread adjustments, which Bloomberg dutifully computed the same day.

All of these are good changes to update in the hardwired language. The question remains whether they are worth adopting at this time. In concept, it is simple enough to update the template forms for new loans. However, it involves more effort, coordination and time than one might expect and introduces yet another variation in the loan portfolio. The backdrop for these changes is that by the end of 2021, and preferably sooner, all lenders should stop originating LIBOR loans, even with updated hardwired language, and only originate SOFR loans. Different lenders are at different stages of readiness for this task, with some ready to make SOFR loans in the coming weeks and months, and others likely to be pushing the New Year’s Eve deadline. It is a monumental task involving many departments at a bank and requires substantial drafting and thought.

To the extent that revising the hardwired language detracts from this effort, a lender might determine that the existing hardwired language is good enough for the remaining LIBOR loans that it will make this year. If a lender is switching to SOFR by mid-year, it may not be so many loans. The ARRC drafted the 2020 language to encompass the SOFR future, however that future might develop. The value of the updated ARRC language is that it takes the recent developments and shows market participants the practical effect those developments have on the SOFR future. This benefit can be obtained whether or not the updated language is actually implemented in any particular loan agreement.

 

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo, and Han Wang.

LIBOR Transition: Legacy Loans on the Backburner

Now that the formal end dates for LIBOR have been announced by the FCA, it’s time to consider some of the practical implications  of the announcement. With the original end date scheduled for the end of 2021, many in the market breathed a collective sigh of relief at the possibility of an extension of the deadline. Among all the other complicated tasks to be completed before LIBOR’s demise, getting borrowers, many of which are oblivious to the  coming change, to amend the millions of legacy loans originated before the end of LIBOR was even contemplated is a particularly daunting one.

Although the 1-week and 2-month US dollar LIBOR tenors will still end on December 31, 2021, the 1-month, 3-month and 6-month LIBOR tenors used in the majority of loans will now end on June 30, 2023. By design, this extension has a number of effects. First, it reduces the number of legacy loans that will need to be amended to replace LIBOR, since some of those loans will expire by their terms during the additional time period. Second, it gives a lender more leverage to amend some of its loans. A borrower that wants to extend a loan that is expiring or that wants or needs an amendment or waiver during such time will not be able to just say no to a new interest rate. Third, for all legacy loans, it gives lenders more time to prepare for and explain to their borrowers the coming change.

Delaying the amendment of legacy loans is not entirely advantageous to lenders. Since lenders will not be permitted to originate new LIBOR loans after 2021, extending the wind down of LIBOR lengthens the period of time during which lenders will have to maintain and keep track of LIBOR and the replacement rates. Delaying amendment of legacy loans will also delay adoption of the new rates, which can hinder their success, for example in the development of Term SOFR.

Still, with all the other tasks that remain to be completed, it’s good to be able to put a major part of the work on the back burner to focus on getting replacement rates operational. Legacy loans are not completely out of mind—the LSTA should be coming out soon with sample forms of LIBOR transition amendments and notices for syndicated loans, which can be modified for other loans. Perhaps by the time comes for them to be used, the transition of legacy loans will not be such an insurmountable task.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo, and Han Wang.

LIBOR Transition: Is a Universal Descriptive Amendment the Answer to Amending All Those Loan Agreements?

Until now, LIBOR replacement amendments have mostly consisted of placeholder language that describes the process and principles that the parties will follow to transition to a new rate while the market works out the details of how the new rate will work. The variations have included a consensual amendment approach, a hardwired approach of mutually agreed preferred alternative rates with the lender to determine the details, and a lender discretion approach where the borrower has little if any say in what the replacement will look like.

Now that the phase out of LIBOR is on the horizon and the replacement details are starting to come together, it’s time to focus on what the actual amendments to delete LIBOR and insert a new rate into the countless LIBOR loan agreements should look like.  A traditional amendment approach would use surgical precision to delete every LIBOR definition and go section by section, and perhaps even sentence by sentence or line by line, to delete the use and effect of LIBOR throughout the agreement, then do the same thing to add in the provisions for the new rate.  This approach depends on detailed due diligence of the underlying loan agreements.  Absolute precision is required to do it right- if the wrong term is used because a template definition was changed in a particular loan agreement, or the wrong section is referred to because a template provision was moved in a particular loan agreement, the amendment will also be wrong and won’t work.  Precision takes time and money, and it’s not clear that borrowers will want to honor their obligations to pay for expensive loan amendments that they never wanted in the first place.

Since no one is perfect, should we just tolerate sloppy drafting when it happens, or is there a better way?  As complicated as it can be to amend countless loan agreements, the concept is simple—after a specified date, all LIBOR terms and provisions will be deleted and replaced with new SOFR (or Ameribor or some other rate) provisions.  Why can’t the amendment just say that?  The drafting required isn’t literally that simple, but this type of universal descriptive amendment should be able to amend almost any loan agreement without knowing exactly what LIBOR terms are used, exactly where they are used or exactly what the LIBOR provisions say.

Our recent Alert discusses how a universal descriptive amendment might work and the potential advantages it may have to successfully achieve LIBOR transition.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo, and Han Wang.

LIBOR Transition: Is It Really Necessary to Review Every Single Loan Agreement?

As lenders start to prepare for the transition from LIBOR, practical concerns as to how to implement the change are coming to the forefront.  Many sources have highlighted the need for lenders to review the loan agreements in their portfolios, but not many have given much insight on the actual scope of review that is needed.

Best practices dictate that every loan agreement should be reviewed to see exactly what LIBOR terms are used, exactly where they are used and exactly what the LIBOR provisions say.  Even if a lender’s loan agreements generally follow a template, there are bound to be a few that vary.  Unless there is already a reliable list of these variances, all the loan agreements (in a perfect world) need to be reviewed to find these few that vary.  In larger, more negotiated loan portfolios, these loans that vary may be more than just a few.

All of this is obviously expensive and time consuming.  Is there a better way?  Our recent Alert explores that question.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo, and Han Wang.

LIBOR Transition: The Protocol is Coming! The Supplement is Coming!

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.

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LIBOR Transition: Time Marches on for Non-Bank Lenders and Asset Managers

Tick-tock. No, not the controversial social networking platform. That’s the sound of time slipping away on the existence of LIBOR. Regulated bank lenders are at varying stages in their transition to a new interest rate, with some even testing the waters originating new loans bearing interest based on SOFR.  Non-bank lenders and asset managers are no less subject to the phase out of LIBOR, but for many the transition process is not quite so far along.

For those who missed it, our new partner, Anastasia Kaup, wrote an informative Alert outlining some of the developments in LIBOR transition over the summer and some of the developments yet to come.  Since the summer, at least one syndicated loan has reportedly been originated using the ARRC recommended hardwired approach. However, it remains to be seen whether the rest of the market will follow or stick with the amendment approach and simply go straight to SOFR amendments. It’s still a bit early for SOFR amendments, but the LSTA is working on a sample for the syndicated loan market based on a form that Duane Morris developed.  Our Alert highlights some of the LIBOR transition issues for non-bank lenders and asset managers to consider as we march towards the end of the year.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo, and Han Wang.

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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