A quick reference guide to Practical Law Finance resources on LIBOR fallback language for loan agreements.
LIBOR is an interest rate benchmark that was used as a reference rate for a wide range of financial transactions. This benchmark was discontinued on December 31, 2021 for certain USD LIBOR tenors and was discontinued on June 30, 2023 for the remaining USD LIBOR tenors.
Well before LIBOR's cessation, US federal agencies encouraged banks to cease entering into new contracts that used LIBOR as a reference rate. If contracts used LIBOR, robust fallback language should have been included that provided for a clearly defined alternative reference rate after LIBOR's discontinuation. The agencies recognized that the extension of the publication of the most common panel USD LIBOR tenors until June 2023 should have allowed most legacy USD LIBOR contracts to mature before LIBOR experienced disruptions.
The ARRC published recommended LIBOR fallback language for various cash products, including syndicated loans and bilateral business loans. The ARRC suggested three approaches that agents and lenders could have used to address the discontinuation of LIBOR:
Amendment approach.
Hardwired approach.
Abridged hardwired approach.
According to the ARRC, agents in syndicated loans or lenders in bilateral loans may also "deem it prudent to include general disclaimer language with respect to LIBOR or any successor rate" in their loan agreements.
This Toolkit contains helpful resources for loan agreement LIBOR fallback language. As panel USD LIBOR has been discontinued, this language should no longer be used in new loan agreements. For information on SOFR fallback language, see Practice Note, What's Market: SOFR Spread Adjustments and Fallback Language.
For a guide to resources that covers important developments relating to LIBOR succession for the primary loan market as well as the derivatives and structured finance markets, see LIBOR Replacement Toolkit.
ARRC Fallback Language
Amendment approach. Under this approach, following a trigger event, the borrower and the administrative agent facilitate a streamlined loan agreement amendment to replace LIBOR by selecting a successor rate and a spread adjustment. For information about recommended fallback language using the amendment approach for syndicated loans, see Legal Update, ARRC Recommends Fallback Benchmark-Replacement Language for Syndicated Loans and Floating Rate Notes (May 2019).
Hardwired approach. Under this approach, fallback language is included in the loan agreement that provides for a specified waterfall of replacement benchmark rates after a trigger event occurs. The ARRC's best practice recommendation since mid-2020 has been to use hardwired fallback language in loan agreements referencing LIBOR. For information about the ARRC's recommended fallback language using the hardwired approach for: