ARRC Issues Recommended Hardwired Fallback Language for Syndicated and Bilateral Business Loans and Publishes Suggested LIBOR-to-SOFR Swap Fallback Formula | Practical Law

ARRC Issues Recommended Hardwired Fallback Language for Syndicated and Bilateral Business Loans and Publishes Suggested LIBOR-to-SOFR Swap Fallback Formula | Practical Law

The Alternative Reference Rates Committee (ARRC) issued supplemental versions of its recommended hardwired fallback language for USD LIBOR syndicated and bilateral business loans and published a whitepaper describing a suggested formula to calculate fallbacks from the USD LIBOR ICE Swap Rate to a spread-adjusted Secured Overnight Financing Rate (SOFR) Swap Rate.

ARRC Issues Recommended Hardwired Fallback Language for Syndicated and Bilateral Business Loans and Publishes Suggested LIBOR-to-SOFR Swap Fallback Formula

by Practical Law Finance
Published on 01 Apr 2021 • USA (National/Federal)
The Alternative Reference Rates Committee (ARRC) issued supplemental versions of its recommended hardwired fallback language for USD LIBOR syndicated and bilateral business loans and published a whitepaper describing a suggested formula to calculate fallbacks from the USD LIBOR ICE Swap Rate to a spread-adjusted Secured Overnight Financing Rate (SOFR) Swap Rate.
In March 2021, the Alternative Reference Rates Committee (ARRC) published:
The supplemental language and the whitepaper follow announcements by LIBOR's administrator, the ICE Benchmark Administration (IBA), and regulator, the UK Financial Conduct Authority (FCA), confirming their intentions to cease publishing all tenors of LIBOR settings and announcing the dates on which all LIBOR settings will either cease to be provided or no longer be representative (see Legal Updates, ICE Benchmark Administration (IBA) Issues Feedback Statement on Intention to Cease Publication of LIBOR Settings and FCA Statement on Future Cessation and Loss of Representativeness of LIBOR Benchmarks).

Recommended Hardwired Fallback Language

The recommended hardwired fallback language supplements are designed to supplement previously released language for USD LIBOR syndicated and bilateral business loans (see Legal Updates, ARRC Releases Updated Recommended Hardwired Fallback Language for Syndicated Loans and ARRC Releases Updated Recommended Fallback Language for Bilateral Business Loans) by providing more simplified versions. The supplemental versions also incorporate the certainty on fallback timing as well as the economic values of the ARRC's recommended spread adjustments which were fixed on March 5, 2021 (see Legal Update, ISDA Issues Statement and Guidance on Future Cessation and Non-Representativeness of LIBOR).
In pertinent part, the recommended hardwired fallback language supplements:
  • Reference the announcements made by the IBA and FCA on March 5, 2021 and address the replacement of LIBOR and the replacement of future benchmarks.
  • Alter the definition of "benchmark replacement" to include the fixed spread adjustments.
  • Have a two-step waterfall to determine the applicable successor rate to LIBOR:
    • term SOFR plus the fixed spread adjustment; or
    • daily simple SOFR plus a spread adjustment selected or recommended by the relevant governmental body.
The ARRC issued the supplemental versions in part to reflect its efforts to support a seamless transition away from USD LIBOR to SOFR by providing fallback language that is more accessible and transparent. It does not replace or supersede prior language. Market participants may use either the original 2020 fallback language or the simplified 2021 fallback language and achieve the same result.

Suggested LIBOR-to-SOFR Swap Fallback Formula

The ICE Swap Rates, previously known as ISDAFIX (see Legal Update, ISDAFIX Now Called ICE Swap Rate, Transitions to New Calculation Methodology) and sometimes referred to as the constant-maturity swap (CMS) rates, is calculated from tradable quotes sourced from regulated electronic-trading venues that require no expert or subjective judgment or panel-bank submissions. It represents the average mid-market swap rate for selected maturities at specific times on a daily basis for three major currencies: Euro, British pound, and USD. Market participants use the rate as a factor in valuation and settlement of derivatives contracts and as a reference rate for floating rate bonds.
Due to the likelihood that there will be no available cleared USD LIBOR swap data that can be used to compute and publish the LIBOR ICE Swap Rate after June 30, 2023, market participants will likely need to use LIBOR Ice Swap Rate contractual fallbacks after that date for LIBOR swaptions that are settled using collateralized cash price settlement as well as CMS-linked derivatives and debt instruments.
The suggested fallback formula relies on three key principles: