{"id":294,"date":"2020-08-31T19:43:54","date_gmt":"2020-08-31T23:43:54","guid":{"rendered":"http:\/\/blogs.duanemorris.com\/bankinglaw\/?p=294"},"modified":"2020-08-31T19:43:54","modified_gmt":"2020-08-31T23:43:54","slug":"to-hardwire-or-not-to-hardwire","status":"publish","type":"post","link":"https:\/\/blogs.duanemorris.com\/bankinglaw\/2020\/08\/31\/to-hardwire-or-not-to-hardwire\/","title":{"rendered":"To Hardwire or Not to Hardwire?"},"content":{"rendered":"

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<\/a> by the middle of next year.\u00a0 The official answer is easy\u2014hardwired LIBOR transition language is recommended by the ARRC for syndicated loans<\/a> and bilateral loans<\/a>.\u00a0 For diligent lenders, adopting hardwired language is part of a proactive approach to addressing the LIBOR transition process.\u00a0 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<\/a> discusses the hardwired approach in more detail.<\/p>\n

Still, for some lenders there are solid reasons to adopt a wait and see approach and possibly skip the hardwired language.\u00a0 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.\u00a0 Determining how the broad market will handle the transition and keeping a lender\u2019s actions in line with the market without getting ahead of the developments may suggest a more cautious approach.<\/p>\n

Legacy loans that either do not have LIBOR transition language (other than to base or prime rate), or that have some variation of the amendment approach language, will need to be amended to include a new SOFR interest rate.\u00a0 Separate work flow processes and documentation will need to be developed to implement the transition for each of these types of loans.\u00a0 Adopting the hardwired approach for new loans adds yet another work flow process to be developed and implemented.\u00a0 Existing loan forms need to be amended to add the hardwired approach language.\u00a0 The language needs to be vetted and understood by the business and legal teams and explained to and negotiated with borrowers.\u00a0 In the transition process, these new loans will need to be treated differently than the pre-hardwired approach loans.\u00a0 The SOFR amendment forms will need to be adapted into notices, with the same type of review and vetting described above.\u00a0 \u00a0None of these actions is particularly difficult, but it takes time and effort, and they will likely apply to a limited subset of a lender\u2019s loans\u2014only loans originated in the next six to nine months (ideally).\u00a0 After that, lenders should only be originating SOFR loans.<\/p>\n

One of the main benefits of going through the effort above is that sending a notice later on is easier that having to negotiate an amendment.\u00a0 But is it really that much easier?\u00a0 All the hardwired approach does is set forth a waterfall of rates to be used in place of LIBOR.\u00a0 Most of the details, including the mechanics of how the replacement rate will be calculated and used, the spread adjustment to make the new rate approximate LIBOR, and the conforming changes to such concepts as interest periods, interest payment dates and prepayment premiums, are left to the future.\u00a0 Many of these details are still being thought through by industry leaders\u2014they should be coming out soon, but they\u2019re not quite there yet.\u00a0 There is little or no definitive guidance, much less market practice.\u00a0 In this context, what is a borrower really agreeing to?\u00a0 If a lender believes that it can sign a loan agreement today with hardwired language and simply send a notice to the borrower next June with the SOFR details, it may find that some borrowers think differently.<\/p>\n

Whether a lender chooses the amendment approach or the hardwired approach, the communication part of the LIBOR transition process should begin now and be a fluid one as the picture becomes clearer and a lender develops the details of its SOFR interest rate product.\u00a0 Waiting for the market to work out the details should not be an excuse to delay\u2014LIBOR transition is coming and much work lies ahead.\u00a0 Communicating is part of that work, and it allows the borrower to be part of the process, evaluate the details and have its questions and comments addressed.\u00a0 Ultimately, these efforts can help make the SOFR interest rate option work more smoothly, as operational and practical issues in implementing SOFR are bound to arise for the foreseeable future.\u00a0 Importantly, involving borrowers in the process can get them more comfortable with the transition to SOFR.\u00a0 At that point, having them sign an amendment rather than giving them a notice may not be such a big difference.<\/p>\n

Duane Morris\u2019 LIBOR Transition Team:\u00a0\u00a0Roger S. Chari<\/a>, Chair,\u00a0Joel N. Ephross<\/a>,\u00a0Amelia (Amy) H. Huskins<\/a>,\u00a0Phuong (Michelle) Ngo<\/a>, and\u00a0Han Wang<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

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.\u00a0 The official answer is easy\u2014hardwired LIBOR transition language is recommended by the ARRC for syndicated loans … <\/p>\n

Continue reading “To Hardwire or Not to Hardwire?”<\/span><\/a><\/p>\n","protected":false},"author":414,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[253,264,240,291,248,247,250,242,263,265,252,227,228,243,236,245,241,256,257,206,266,237,268,271,258],"ppma_author":[346],"class_list":["post-294","post","type-post","status-publish","format-standard","hentry","category-general","tag-amelia-huskins","tag-amendment-approach","tag-amy-huskins","tag-bilateral-loans","tag-chari","tag-duane-morris","tag-ephross","tag-han-wang","tag-hardwired-approach","tag-hardwired-language","tag-huskins","tag-joel-ephross","tag-libor","tag-libor-replacement","tag-libor-transition","tag-london-interbank-offered-rate","tag-michelle-ngo","tag-ngo","tag-phuong-ngo","tag-roger-chari","tag-secured-overnight-financing-rate","tag-sofr","tag-syndicated-loans","tag-usd-libor","tag-wang"],"authors":[{"term_id":346,"user_id":414,"is_guest":0,"slug":"rschari","display_name":"Roger S. Chari","avatar_url":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-content\/uploads\/sites\/14\/2020\/02\/chariroger-125x150.jpg","0":null,"1":"","2":"","3":"","4":"","5":"","6":"","7":"","8":""}],"_links":{"self":[{"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/posts\/294","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/users\/414"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/comments?post=294"}],"version-history":[{"count":0,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/posts\/294\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/media?parent=294"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/categories?post=294"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/tags?post=294"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/ppma_author?post=294"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}