Adjustable Interest Rate (LIBOR) Act of 2021 Introduced to Assist with LIBOR Transition | Practical Law

Adjustable Interest Rate (LIBOR) Act of 2021 Introduced to Assist with LIBOR Transition | Practical Law

Representative Brad Sherman (D-Cal.) introduced the Adjustable Interest Rate (LIBOR) Act of 2021 (H.R. 4616), which is intended to establish a clear and uniform nationwide process for replacing LIBOR in existing contracts when the terms of the contract do not provide a clearly defined or practicable replacement benchmark rate. The bill would primarily impact legacy collateralized loan obligation (CLO) transactions.

Adjustable Interest Rate (LIBOR) Act of 2021 Introduced to Assist with LIBOR Transition

by Practical Law Finance
Published on 02 Sep 2021 • USA (National/Federal)
Representative Brad Sherman (D-Cal.) introduced the Adjustable Interest Rate (LIBOR) Act of 2021 (H.R. 4616), which is intended to establish a clear and uniform nationwide process for replacing LIBOR in existing contracts when the terms of the contract do not provide a clearly defined or practicable replacement benchmark rate. The bill would primarily impact legacy collateralized loan obligation (CLO) transactions.
On July 22, 2021, Representative Brad Sherman (D-Cal.) introduced H.R. 4616, the Adjustable Interest Rate (LIBOR) Act of 2021 (2021 LIBOR Act), to the US House of Representatives. The legislation is intended to:
  • Establish a clear and uniform nationwide process for replacing LIBOR in existing contracts when the terms of such contract do not provide for the use of a clearly defined or practicable replacement benchmark rate.
  • Preclude litigation relating to existing contracts upon LIBOR's cessation.
  • Allow existing contracts that reference LIBOR but provide for the use of a clearly defined fallback and practicable replacement rate, to operate according to their terms.
The 2021 LIBOR Act would provide relief almost exclusively to collateralized loan obligation (CLO) indentures executed prior to 2018, since these transactions typically do not include LIBOR fallback language. According to an FAQ issued by the Loan Syndications and Trading Association (LSTA), for such CLO outstanding at the end of June 2023, the legislation would essentially "write in" ARRC fallback language into the indentures, meaning those CLOs would fallback to a SOFR-based rate (including any spread adjustment) recommended by the "relevant recommending body" (the Federal Reserve Board, the Federal Reserve Bank of New York, or the ARRC).
The 2021 LIBOR Act is similar to New York Senate Bill 297B/Assembly Bill 164B and Alabama Senate Bill 279, both of which are designed to provide legal certainty regarding the cessation of LIBOR, particularly for legacy contracts without effective fallback (see Legal Update, New York State Legislature Passes Bill Designed to Provide Smooth Transition Away from LIBOR). As such, the 2021 LIBOR Act would not override existing contract language that specifies a non-LIBOR-based rate as a fallback and would not significantly impact legacy bilateral and syndicated business loans since they generally provide an alternative base rate in cases where LIBOR is not available.
The 2021 LIBOR Act would supersede any state laws that provide for the selection or use of a benchmark replacement, and if adopted, parties to contracts referencing LIBOR will need to look to the 2021 LIBOR Act in order to determine how they should perform under their contracts. If implemented, the 2021 LIBOR Act would also amend a provision of the Trust Indenture Act (TIA) of 1939 that could otherwise prohibit changes to certain securities and clarifies the tax treatment of contracts where LIBOR is replaced by SOFR.
For more information on LIBOR replacement and interest rate benchmark reform, see LIBOR Replacement Toolkit.