With LIBOR's likely phase-out just over a year away, market participants continue to prepare their loan agreements for a successful transition to a replacement reference rate. Some loan parties have recently moved one step further in the process, adding hardwired fallback language to their loan documents.

The Loan Syndications and Trading Association (LSTA), as well as the Alternative Reference Rates Committee (ARRC), have been encouraging loan parties to start including hardwired fallback language referencing SOFR in their syndicated loan agreements by the third quarter of 2020. Currently, the market almost universally follows the amendment approach, under which, following a trigger event, the borrower and administrative agent facilitate a streamlined amendment to replace LIBOR by selecting a successor rate and spread adjustment. Under the hardwired approach, fallback language is included in the credit agreement that provides more certainty on the successor rate and spread adjustment and in many cases removes the need for consent for an amendment.

Several borrowers have incorporated hardwired fallback language in their recent credit agreements and credit agreement amendments, including:

Practical Law Finance will continue to monitor this development.