ARRC Releases Consultations on LIBOR-Fallback Contract Language for Floating Rate Notes and Syndicated Business Loans | Practical Law

ARRC Releases Consultations on LIBOR-Fallback Contract Language for Floating Rate Notes and Syndicated Business Loans | Practical Law

The Alternative Reference Rates Committee (ARRC) is seeking public comment USD LIBOR fallback contract language for floating rate notes and syndicated business loans.

ARRC Releases Consultations on LIBOR-Fallback Contract Language for Floating Rate Notes and Syndicated Business Loans

by Practical Law Finance
Published on 04 Oct 2018 • USA (National/Federal)
The Alternative Reference Rates Committee (ARRC) is seeking public comment USD LIBOR fallback contract language for floating rate notes and syndicated business loans.
On September 24, 2018, the Alternative Reference Rates Committee (ARRC) released two 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 the 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 LIBOR.
Market participants may submit comments to ARRC on the consultations through November 26, 2018.

Floating Rate Notes

The proposed ARRC provisions that trigger the conversion from LIBOR to a new reference rate are consistent with ISDA® triggers in the event that LIBOR is permanently discontinued (see Legal Update, ISDA® Releases Consultation on Technical Issues Related to Benchmark Fallbacks). The ARRC is seeking public comment on proposed triggers where LIBOR is not permanently discontinued, but its quality has materially deteriorated in one of the following ways:
  • The benchmark is not published for five consecutive business days.
  • The administrator of the benchmark announces that the submissions for compiling the rate have fallen below the minimum required number.
  • The administrator of the benchmark provides that it is no longer representative or may no longer be used.
The proposed language also includes a six-step fallback replacement benchmark waterfall, specifying the priority of particular successor rates to be used.

Syndicated Business Loans

The AARC is seeking public comment on two proposed approaches to developing more robust syndicated loan benchmark-fallback language:
  • An amendment approach, that would provide market participants with a streamlined amendment process for negotiating a replacement benchmark.
  • A hardwired approach, that would provide market participants with more clarity concerning how a replacement rate will be identified and implemented, as this approach would specify a particular version of SOFR that would be used and a particular replacement benchmark spread that would be used upon cessation of LIBOR.
The triggers for both approaches would be the same as those noted above for floating rate notes, along with the following respective early "opt-in" triggers:
  • For the amendment approach, the administrative agent or required lenders may determine that syndicated loans in the market are being executed or amended to incorporate or adopt a replacement for LIBOR; if so, this determination would trigger application of the applicable fallback rate.
  • For the hardwired approach, either the borrower or administrative agent can initiate the fallback option if at least two identifiable and publicly available loan facilities refer to term SOFR plus a particular replacement benchmark spread.
The proposed language for the hardwired approach includes a four-step replacement benchmark waterfall, specifying the priority of particular successor rate to be used. The amendment approach, in contrast, provides that the borrower and administrative agent would propose a successor rate plus a spread adjustment.