On September 24, 2018, the Federal Reserve Bank of New York’s Alternative Reference Rates Committee (ARRC) released two consultations for certain cash products—floating rate notes (FRNs) and syndicated business loans (Loans)—in furtherance of the ARRC’s paced LIBOR transition plan to the Secured Overnight Financing Rate (SOFR) selected by the ARRC to replace LIBOR. Similar ARRC consultations for other cash products, including securitization, are expected to follow soon.
Both consultations follow ARRC’s guiding principles for LIBOR fallback language and are designed to provide general consistency across all similar products with the intent that they operate similarly during a LIBOR cessation event and reduce operational, legal and basis risks and, while each consultation is tailored to the related cash product, they seek such consistency by defining certain key terms, including:
- Trigger events—events that start the transition from LIBOR to a new reference rate;
- A successor rate “waterfall”—a provision specifying the priority of unadjusted rates that would replace LIBOR; and
- A spread adjustment “waterfall”—a provision specifying the priority of spread adjustments that would be applied to the successor rate because of differences between LIBOR and SOFR.
In addition, the Loans consultation includes two proposed “amendment” and “hardwired” approaches:
- Hardwired Approach—This approach would provide certainty upfront, and it is similar to the proposed fallback provision described above. In the event that LIBOR is no longer usable, this approach would clearly specify which SOFR-based rate and which spread adjustment to use. Neither borrowers nor lenders would be able to make modifications to the replacement rate designated in the waterfall.
- Amendment Approach—This approach would provide a streamlined amendment mechanism for negotiating a replacement benchmark and could serve as an initial step towards a hardwired approach. It uses loans’ flexibility to create a simpler, streamlined amendment process.
Comments on the consultations are due on or before November 8, 2018. Several industry groups are convening interested members and preparing such comments, including the Loan Syndication and Trading Association, the Securities Industry and Financial Markets Association and the Structured Finance Industry Group. Interested parties are encouraged to reach out to these groups and participate in the comment process.