Phase-Out of LIBOR: Revising Floating Rate Loans to Implement Alternative Reference Rates, ISDA Revisions

Description

The UK's Financial Conduct Authority announced in 2017 that it would stop requiring reference banks to quote LIBOR by the end of 2021. LIBOR is used in calculating floating rates on trillions of dollars in loans, bonds, derivatives, and other financial contracts, including adjustable-rate mortgage loans. Real estate and finance counsel must contemplate the phaseout when drafting loan documents and reviewing or amending existing loan documents.

The proposed U.S. replacement for U.S. dollar LIBOR is the Secured Overnight Financing Rate (SOFR), a broad-based Treasury repo financing rate recommended by the Alternative Reference Rate Committee (ARRC) of the Federal Reserve Bank of New York (N.Y. Fed). The N.Y. Fed has been publishing overnight SOFR rates since April 2018, and in March 2020 began publishing compounded averages of SOFR over rolling 30-day, 90-day, and 180-day periods (the SOFR Averages), to better define the calculation of SOFR.

The ARRC released proposed fallback language, which provides valuable guidance for parties in negotiations over either a new credit agreement or an amendment to an existing credit agreement linked to LIBOR. They suggest two basic approaches to LIBOR fallback language: a "hardwired approach," which explicitly references variations on SOFR, and an "amendment approach," which refers to the then-existing market convention should LIBOR cease to be published.

Counsel should review loan documents with a term beyond 2021 to ensure that fallback language is incorporated, along with appropriate triggers for switching to an alternative reference rate and the mechanics for how an alternative reference rate and related spread adjustment will be chosen.

Listen as our authoritative panel discusses the impact of the phaseout of LIBOR and the use of SOFR as a substitute rate and examines options for approaching the uncertainty surrounding the coming change. The panel will also discuss how ISDA is addressing the phaseout.