IMPACT OF LIBOR CHANGES TO LOAN DOCUMENTATION AND IMPLICATIONS FOR LENDER LIABILITY
September 12, 2019*
Christina Rissler, Partner
Joint Meeting of the Loan Documentation Sub-Committee and the Lender Liability Sub-Committee of the Commercial Finance Committee of the Business Law Section of the ABA
*Presentation updated September 17, 2019
Yes, it is a big dealLIBOR cessation
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And it is only getting biggerLIBOR cessation
3Source: ISDA SwapsInfo Weekly Analysis: Week Ending August 9, 2019
Potential for litigationLIBOR cessation
“You can imagine the litigation risk when the reference rate for a 20-year contract disappears and there’s no clear path to replace it. Now imagine 190 trillion dollars’ worth of those contracts. This is a DEFCON 1 litigation event if I’ve ever seen one.”
Michael Held, Executive Vice President and General Counsel
Remarks at the SIFMA C&L Society February Luncheon, New York City (February 26, 2019)
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Eversheds Sutherland
Alternative Reference Rate Committee (“ARRC”)
What is the ARRC?Alternative Reference Rate Committee (“ARRC”)
“The ARRC is a group of private-market participants working to helpensure a successful transition from USD LIBOR to a more robustreference rate (it has selected SOFR). It is comprised of a diverse setof private-sector entities, each with an important presence in marketsaffected by USD LIBOR, and a wide array of official-sector entities,including banking and financial sector regulators, as ex-officiomembers. It was initially convened in 2014, to identify risk-freealternative reference rates to USD LIBOR, identify best practices forcontract robustness, and create an implementation plan for anorderly adoption. It accomplished that initial set of objectives, andtoday, the ARRC is working to help ensure the successfulimplementation of the Paced Transition Plan, address the increasedrisk that LIBOR may no longer be usable beyond 2021, and serve asa forum to coordinate and track planning across cash and derivativesproducts and market participants currently using USD LIBOR.”
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Who is on the ARRC?Alternative Reference Rate Committee (“ARRC”)
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Consultations and recommendationsAlternative Reference Rate Committee (“ARRC”)
─ ARRC Consultations – To date, ARRC has released five consultations proposing draft language for the following types of transactions:• Floating Rate Notes (September 24, 2018)
• Syndicated Business Loans (September 24, 2018)
• Bilateral Business Loans (December 7, 2018)
• Securitizations (December 7, 2018)
• New Closed-end, Residential Adjustable Rate Mortgages (July 12, 2019)
─ ARRC Recommendations – To date, ARRC has released its recommended USD LIBOR fallback contract language for:• Floating Rate Notes (April 25, 2019)
• Syndicated Business Loans (April 25, 2019)
• Bilateral Business Loans (May 31, 2019)
• Securitizations (May 31, 2019)
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What options did ARRC give us for fallback language?ARRC recommendations
Triggers: syndicated loans and bilateral loans: hardwired and amendment
ARRC recommendations
─ Benchmark Transition Event – the event that initiates a transition from the current Benchmark to the Benchmark Replacement• Permanent Cessation Triggers
• A benchmark administrator announcing that the administrator has or will cease to provide the benchmark permanently or indefinitely
• The benchmark administrator's regulator announcing that the benchmark administrator has or will cease to provide the benchmark permanently or indefinitely
• A benchmark administrator's regulator publicly stating that the benchmark is no longer representative
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Triggers: syndicated loans and bilateral loans: hardwired and amendment
ARRC recommendations
─ Early Opt-in Election – Syndicated Loans - Hardwired• A notification by the Administrative Agent (or the request by the Borrower to notify) each
of the other parties that at least [5] currently outstanding US$ syndicated credit facilities contain (as a result of amendment or as originally executed) as a benchmark interest rate, in lieu of LIBOR, Term SOFR plus a Benchmark Replacement Adjustment (and such syndicated credit facilities are identified in such notice and are publicly available for review) or
• The joint election by the Administrative Agent, the Borrower and the Required Lenders to declare that an Early Opt-in Election has occurred and the provision of notice
─ Early Opt-in Election – Syndicated Loans - Amendment• A determination by the Administrative Agent or the Required Lenders that US$ syndicated
credit facilities being executed at such time, or that include similar amendment fallback language, are being executed or amended to incorporate a new benchmark interest rate to replace LIBOR, or
• The election by the Administrative Agent or the Required Lenders to declare that an Early Opt-in Election has occurred and the provision of notice
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Triggers: syndicated loans and bilateral loans: hardwired and amendment
ARRC recommendations
─ Early Opt-in Election – Bilateral Loans
• A determination by the Lender that at least [5] currently outstanding US$ syndicated or bilateral credit facilities at such time contain (as a result of amendment or as originally executed) as a benchmark interest rate, in lieu of LIBOR, …
• Hardwired … [Term SOFR plus a Benchmark Replacement Adjustment [(and such credit facilities are identified in the applicable Rate Election Notice and are publicly available for review)], or]
• Amendment … [a new benchmark interest rate to replace LIBOR, or]
• The election by the Lender to declare that an Early Opt-in Election has occurred and the provision of notice
But, if an Early Opt-in Election is made, both the Hardwired Bilateral Approach and the Amendment Bilateral Approach include optional language that if selected would give the Borrower a negative consent right with respect to the Benchmark Replacement for [5][10] Business Days from the date of provision of notice by the Lender.
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Benchmark replacement: syndicated loans and bilateral loansARRC recommendations
─ Hardwired Approach = • Waterfall
• (1)(a) Term SOFR for corresponding tenor (that is displayed on a screen or published)
• (1)(b) Next available Term SOFR (that is displayed on a screen or published)
• (2) Compounded SOFR (that is displayed on a screen or published)
• (3) Alternative Rate selected by [Administrative Agent and Borrower][Lender]
• Giving due consideration to (i) any selection or recommendation of a replacement rate or the mechanism for determining such a rate by the Relevant Governmental Body at such time or (ii) any evolving or then-prevailing market convention for determining a replacement rate for the current Benchmark for US$ syndicated [or bilateral] credit facilities at such time
• If the Alternative Rate is selected pursuant to the waterfall, the Required Lenders have a negative consent right for the 5 Business Days after notice is provided to the Lenders
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Benchmark replacement: syndicated loans and bilateral loansARRC recommendations
─ Amendment Approach = • Alternative Rate selected by [Administrative Agent and
Borrower][Lender]
• Giving due consideration to (i) any selection or recommendation of a replacement rate or the mechanism for determining such a rate by the Relevant Governmental Body at such time or (ii) any evolving or then-prevailing market convention for determining a replacement rate for the current Benchmark for US$ syndicated [or bilateral] credit facilities at such time
• The Required Lenders have a negative consent right for the 5 Business Days after notice is provided to the Lenders
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Benchmark Replacement Adjustments: syndicated loans and bilateral loans
• Selected or recommended by the Relevant Governmental Body (that is displayed or published on a screen)
• That would apply to the fallback rate for a derivative transaction referencing the ISDA Definitions (that is displayed or published on a screen)
• Alternative Rate –
• Selected by [Administrative Agent and the Borrower][Lender] [giving dueconsideration to (i) any selection or recommendation of a spread adjustment, ormethod for calculating or determining such spread adjustment, for the replacementof the then-current Benchmark with the applicable Unadjusted BenchmarkReplacement by the Relevant Governmental Body at such time or (ii) any evolving orthen-prevailing market convention for determining a spread adjustment, or methodfor calculating or determining such spread adjustment, for the replacement of thethen-current Benchmark with the applicable Unadjusted Benchmark Replacement forU.S.$ syndicated [or bilateral] credit facilities at such time]
• Due consideration language is only bracket in Bilateral Loans Language
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Benchmark Replacement Adjustments: syndicated loans and bilateral loans
ARRC recommendations
─ Amendment Approach = • Alternative Rate –
• Selected by [Administrative Agent and the Borrower][Lender] [giving due consideration to (i) any selection or recommendation of a spread adjustment, or method for calculating or determining such spread adjustment, for the replacement of the then- current Benchmark with the applicable Unadjusted Benchmark Replacement by the Relevant Governmental Body at such time or (ii) any evolving or then-prevailing market convention for determining a spread adjustment, or method for calculating or determining such spread adjustment, for the replacement of the then-current Benchmark with the applicable Unadjusted Benchmark Replacement for US dollar-denominated syndicated or bilateral credit facilities at such time]
• Due consideration language is only bracket in Bilateral Loans Language
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Standards for Decisions and Determinations: syndicated loans and bilateral loans: hardwired and amendment
ARRC recommendations
Any determination, decision or election that may be made by the [AdministrativeAgent][Administrative Agent or Lenders][Lender] pursuant to this Section,including any determination with respect to a tenor, rate or adjustment or of theoccurrence or non-occurrence of an event, circumstance or date and any decisionto take or refrain from taking any action or any selection, will be conclusive andbinding absent manifest error and may be made in its sole discretion and withoutconsent from [any other party hereto][the Borrower]{, except, in each case, asexpressly required pursuant to this Section}.
• Text in {} is bracketed in the Amendment Bilateral Approach
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Eversheds Sutherland
Market study
Market study: publicly available syndicated credit agreementsWhat’s market: LIBOR fallback language
─ ARRC recommendations• Credit agreements
• May 1, 2019 – August 31, 2019: 38 of 151 (25%) credit agreements reviewed included the ARRC Recommendation for Syndicated Business Loans
• 4 from May, 7 in June, 19 in July, and 8 in August• None used the ARRC Hardwired Approach• (Through August 9th) About half were modified from the ARRC language to give the
Borrower more rights
• However, according to GlobalCapital, the first syndicated credit agreement adopting the ARRC Hardwired Approach recommendation launched in June 2019, with Morgan Stanley as the Agent. This document is not public
• May 1, 2019 – August 31, 2019: Out of 151 Credit Agreements, 102 (68%) followed some version of the more robust LIBOR fallback language that developed in 2018 prior to the consults. This language is an amendment approach and generally is more favorable to Borrowers than the ARRC language.
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Beyond the ARRC recommendations
Bonus: Agent’s LIBOR Disclaimer of Responsibility provision
─ The Agent’s LIBOR Disclaimer of Responsibility provision is language added at the end of the Definition section in credit agreements, whereby the Agent expressly denies responsibility with respect to the submission, administration, and all other matters related to LIBOR and any LIBOR Successor Rate
─ There is a long form and a short form of the provision. The short form derives from the long form
─ Market study• November 2018 – June 11, 2019: Out of 95 investment grade
Credit Agreements, the Agent’s LIBOR Disclaimer of Responsibility provision was present in 48 (50.5%): 26 Short Form, 19 Long Form, three other variations
• April 1 - August 31, 2019: Out of 191 publicly available Credit Agreements, the Agent’s LIBOR Disclaimer of Responsibility provision was present in 42 (22%): 30 Short Form and 12 Long Form or other variations
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Provisions
What’s market: Agent’s LIBOR Disclaimer of Responsibility provision
─ Short form• The Administrative Agent does not warrant, nor accept responsibility, nor shall the Administrative Agent have any
liability with respect to the administration, submission or any other matter related to the rates in the definition of“Eurodollar Rate” or with respect to any comparable or successor rate thereto
─ Long form• The interest rate on LIBOR Loans is determined by reference to the LIBO Rate, which is derived from the London
interbank offered rate. The London interbank offered rate is intended to represent the rate at which contributingbanks may obtain short-term borrowings from each other in the London interbank market. In July 2017, the UKFinancial Conduct Authority announced that, after the end of 2021, it would no longer persuade or compelcontributing banks to make rate submissions to the ICE Benchmark Administration (together with any successor tothe ICE Benchmark Administrator, the “IBA”) for purposes of the IBA setting the London interbank offered rate. As aresult, it is possible that commencing in 2022, the London interbank offered rate may no longer be available or mayno longer be deemed an appropriate reference rate upon which to determine the interest rate on LIBOR Loans. Inlight of this eventuality, public and private sector industry initiatives are currently underway to identify new oralternative reference rates to be used in place of the London interbank offered rate. In the event that the Londoninterbank offered rate is no longer available or in certain other circumstances as set forth in Section 2.15(b), Section2.15 (b) provides a mechanism for determining an alternative rate of interest. The Administrative Agent will notifythe Company, pursuant to Section 2.15, in advance of any change to the reference rate upon which the interest rateon LIBOR Loans is based. However, the Administrative Agent does not warrant or accept any responsibility for, andshall not have any liability with respect to, the administration, submission or any other matter related to the Londoninterbank offered rate or other rates in the definition of Screen Rate or with respect to any alternative or successorrate thereto, or replacement rate thereof, including without limitation, whether the composition or characteristics ofany such alternative, successor or replacement reference rate, as it may or may not be adjusted pursuant to Section2.15(b), will be similar to, or produce the same value or economic equivalence of, the LIBO Rate or have the samevolume or liquidity as did the London interbank offered rate prior to its discontinuance or unavailability
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Additional resources
─ A User’s Guide to SOFR: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Users_Guide_to_SOFR.pdf
─ The Loan Syndications and Trading Association's (“LSTA”) LIBOR FAQ: https://www.lsta.org/news-and-resources/news/libor-free-fallbacking
─ Heitfield, Erik, and Yang-Ho Park (2019). "Indicative Forward-Looking SOFR Term Rates," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, April 19, 2019, https://doi.org/10.17016/2380-7172.2347
