ARRC Releases Consultations on LIBOR-Fallback Contract Language for Bilateral Business Loans and Securitizations | Practical Law

ARRC Releases Consultations on LIBOR-Fallback Contract Language for Bilateral Business Loans and Securitizations | Practical Law

The Alternative Reference Rates Committee (ARRC) is seeking public comment on USD LIBOR fallback contract language for bilateral business loans and securitizations.

ARRC Releases Consultations on LIBOR-Fallback Contract Language for Bilateral Business Loans and Securitizations

by Practical Law Finance
Published on 24 Dec 2018 • USA (National/Federal)
The Alternative Reference Rates Committee (ARRC) is seeking public comment on USD LIBOR fallback contract language for bilateral business loans and securitizations.
On December 7, 2018, the Alternative Reference Rates Committee (ARRC) released two new consultations (December consultations) on USD LIBOR fallback contract language, proposing draft language for the following types of transactions:
The proposed contract language is intended to ensure that contracts referencing LIBOR will remain effective if LIBOR is discontinued. On June 22, 2017, the ARRC recommended Secured Overnight Financing Rate (SOFR) as its proposed alternative to USD LIBOR.
This follows two September 24, 2018 ARRC consultations on USD LIBOR fallback contract language (see Legal Update, ARRC Releases Consultations on LIBOR-Fallback Contract Language for Floating Rate Notes and Syndicated Business Loans).
Market participants may submit comments to the ARRC on the December consultations through February 5, 2019. Following the comment period, the ARRC plans to issue recommendations on final contract language for bilateral business loans and securitizations for use in future LIBOR contracts.

Bilateral Business Loans

Based on recommendations from the ARRC Business Loans Working Group, the ARRC has proposed two different approaches to developing fallback language for bilateral loans:
  • The amendment approach would provide a streamlined amendment mechanist that provides flexibility in negotiating a replacement benchmark and spread adjustment. It would maximize flexibility because it would not rely on or lock in a rate and spread adjustment methodology that does not yet exist.
  • A hardwired approach offers a clear waterfall for selecting a replacement benchmark and spread adjustment that would apply if LIBOR is no longer usable. By defining all terms at the inception of a credit agreement, it would provide greater clarity as to how a potential replacement would be identified and implemented.
The ARRC is seeking public comment on the relationship between loans that implement a replacement benchmark and how the related hedging arrangements that borrowers and lenders use to mitigate risks address benchmark replacement.

Securitizations

The ARRC has proposed an approach to fallback language for new LIBOR-based securities issued in connection with securitizations (including collateralized loan obligations) that includes more robust language than exists in current securitization documents. The ARRC's proposed contract language, found in Appendix I to the release, is intended to allow securitization market participants to replace LIBOR with a more economically appropriate replacement rate and spread adjustment.