On April 8, 2021, the Loan Syndications and Trading Association (LSTA) published a market advisory relating to the inclusion of a "credit sensitive rate" option as part of the LIBOR fallback language in syndicated loan and bilateral loan documentation. The advisory relates to LIBOR replacement and provides sample language for a slot-in rider that can be incorporated into hardwired fallback language so that loans may transition to a credit sensitive rate.

The LSTA developed the sample slot-in rider for fallback language in collaboration with a working group of its members in response to interest in credit sensitive rates that are emerging, and member requests for documentation to account for and accommodate those rates. Currently, there are at least four entities administering or developing reference rates with credit sensitive elements that are being touted as possible alternatives to SOFR, and additional credit sensitive rates may be developed in the future. In the advisory, the LSTA stated its ongoing commitment to facilitate the implementation and use of all viable fallback rate options, and that it believes that its language complements its work to operationalize and implement SOFR-based variants.

The Alternative Reference Rates Committee (ARRC) has previously released recommended LIBOR fallback contract language for syndicated loans and bilateral loans, including a "hardwired approach" which sets out a specified waterfall of replacement benchmark rates (see Practice Note, What's Market: LIBOR Interest Rate Provisions). Practical Law Finance has been tracking LIBOR replacement language in recent publicly-filed loan agreements. The percentage of deals with hardwired fallback language climbed in the first quarter of 2021 to 84%, with approximately 77% of those deals incorporating the ARRC's recommended hardwired fallback language from June 2020 (see Practice Note, What's Market: Hardwired LIBOR Fallbacks). However, the ARRC's benchmark replacement options are limited to SOFR-based variants. The LSTA's slot-in rider can be incorporated into hardwired fallback language so that loans can transition to a credit sensitive rate as the preferred rate either ahead of, in lieu of, or behind adjusted Term SOFR once the key LIBOR tenors cease after June 2023.

The LSTA language included in the advisory offers the following two options:

The LSTA's language is designed to ensure that new or amended loan documentation will have robust fallback language that includes a clearly defined alternative reference rate after LIBOR's discontinuation, in accordance with US Federal agencies' expectations and guidance. For more information on LIBOR replacement, see Practice Note, What's Market: LIBOR Interest Rate Provisions and LIBOR Replacement Toolkit.