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.

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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