Phaseout of LIBOR: Navigating the Final Stages, Implementing Alternative Reference Rates, and Fallback Language

Recording of a 90-minute premium CLE video webinar with Q&A


Conducted on Tuesday, July 27, 2021

Recorded event now available

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This CLE course will discuss the scheduled phaseout of LIBOR (London Interbank Offered Rate) and outline steps real estate and commercial finance counsel must take now to ensure that agreements tied to LIBOR transition appropriately to a new benchmark rate. The panel will discuss how the recent announcements by IBA and FCA created certainty about the timing of LIBOR's end, and fixed the spread adjustments to be added to the recommended replacement rates. The panelists also will contrast the fallback benchmark rates recommended by the Alternative Reference Rate Committee (ARRC) with other benchmark rates that some are considering adopting instead. In addition, the panel will discuss best practices for analyzing legacy agreements and incorporating fallback language into those legacy agreements, as well as incorporating appropriate alternative rate language into form documents for future transactions. The discussion also will touch on the problems with "tough legacy contracts" and the New York and proposed federal legislation designed to tackle this problem.

Description

On Mar. 5, 2021, the regulator and administrator of LIBOR confirmed the end dates for transition away from LIBOR. For most U.S. dollar LIBOR tenors, the final date will be June 30, 2023. Accordingly, real estate and finance counsel must contemplate the transition when drafting loan documents and reviewing or amending existing loan documents.

The ARRC has proposed to replace U.S. dollar LIBOR with the Secured Overnight Financing Rate (SOFR). The Federal Reserve Bank of New York (N.Y. Fed) has published 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 has suggested two basic approaches to LIBOR fallback language: a "hardwired approach," which explicitly refers to a "waterfall" of SOFR variations, and an "amendment approach," which provides greater flexibility to establish fallbacks based on market conventions when LIBOR ceases to be published. On Mar. 25, 2021, ARRC released supplemental recommendations for its hardwired language, greatly simplifying the language given the certainty provided by the March 5 announcements.

Regulators have emphasized that SOFR is not required and that banks are free to explore alternatives. Some lenders continue to seek a reference rate that reflects the cost of unsecured borrowing (known as a credit-sensitive rate), to more closely approximate their funding costs. As a result, the Loan Syndications & Trading Association (LSTA) has developed a credit-sensitive waterfall of options that lenders can use in their fallback language instead of SOFR.

Counsel should review LIBOR-based loan documents with a term beyond 2021 and discuss the alternatives with their clients (borrowers and lenders). Once the borrower and lender have reached a business decision as to the alternative rate, counsel should incorporate appropriate fallback language, including 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 or other indices as substitute rates and examines options for approaching the coming change. Finally, the panel will explain the effect of the LIBOR transition legislation recently passed in New York. The discussion also will touch on a proposed federal law, and how that would bring even more certainty to what will happen to "tough legacy contracts."

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Outline

  1. LIBOR: recently announced timeline for the phaseout
  2. Spread adjustment announcements
  3. Impact on floating rate transactions
  4. Impact on securitized loans
  5. Alternative reference rates: SOFR, credit-sensitive alternatives
  6. Recommended ARRC fallback provisions contemplating a change in reference rate under loan agreements
    1. Amendment approach
    2. Hardwired approach
  7. Supplemental recommendations made in response to "hard" end dates for LIBOR
  8. Recently passed NY legislation and proposed federal legislation designed to smooth transition for tough legacy contracts

Benefits

The panel will review these and other key issues:

  • What is the timeline, and what kinds of transactions will be impacted by the phaseout of LIBOR?
  • What are the issues with alternative rate language currently contained in floating rate loan documents?
  • What alternatives should counsel's clients consider in addressing the transition?
  • How should the floating rate forms be revised to address the transition given the current uncertainty as to the substitute rate?
  • What help is there for "tough legacy contracts" that cannot be amended?

Faculty

Pandozzi, Neal
Neal R. Pandozzi

Senior Counsel
Adler Pollock & Sheehan

Mr. Pandozzi is Co-Chair of the firm’s Public Finance group. He has drafted primary financing documents,...  |  Read More

Williams, Amy
Amy McDaniel Williams

Partner
Hunton Andrews Kurth

Ms. Williams is Chair of the firm’s Opinion Committee, Audit Response Committee and Ethics in Marketing...  |  Read More

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