Tag Archives: syndicated loans

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: 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.

To Hardwire or Not to Hardwire?

The question is not nearly as existential as the question phrased by William Shakespeare, but it is a significant one in the lending world as the transition from LIBOR to SOFR ideally happens by the middle of next year.  The official answer is easy—hardwired LIBOR transition language is recommended by the ARRC for syndicated loans and bilateral loans.  For diligent lenders, adopting hardwired language is part of a proactive approach to addressing the LIBOR transition process.  By setting the broad parameters of the new rate up front now, the ultimate details of implementing the new rate can be simplified with a notice to the borrower rather than negotiating an amendment in the future when time is short. Our prior Alert discusses the hardwired approach in more detail.

Still, for some lenders there are solid reasons to adopt a wait and see approach and possibly skip the hardwired language.  These lenders are no less diligent in their desire to do the right thing, but the developments in the LIBOR/SOFR transition are starting to accelerate, with major details still unsettled at this point.  Determining how the broad market will handle the transition and keeping a lender’s actions in line with the market without getting ahead of the developments may suggest a more cautious approach.

Continue reading To Hardwire or Not to Hardwire?

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.

Continue reading Hardwired for a Smoother LIBOR Transition?