In a flurry of legislative activity on March 24, 2021, the New York State Senate and Assembly passed bills (collectively, “LIBOR Legislation”)1 that, once signed by New York Governor Andrew Cuomo (expected because the legislation was included in the governor’s 2021 budget proposal), will facilitate the transition from LIBOR of “tough legacy” contracts that are governed by New York law and that do not include adequate interest rate fallback provisions that contemplate a permanent cessation of LIBOR.
The LIBOR Legislation aims to address the consequences of the permanent cessation of LIBOR for specified contracts, securities, and other agreements that are economically linked to LIBOR, and does so via an amendment to the New York General Obligations Law that adds a new Article 18-C. Key provisions of the amendment include:
- replacement of LIBOR, by operation of law, in any contract, security or instrument that (a) uses LIBOR as a benchmark and contains no fallback provisions or (b) contains fallback provisions that result in a benchmark replacement (other than a recommended benchmark replacement) that is based in any way on any LIBOR value (including by way of a poll or survey of lending rates), with the benchmark replacement based on SOFR and spread adjustment recommended by a Relevant Recommending Body,2 on the date that LIBOR permanently ceases to be published or is announced to no longer be representative;
- prohibition on parties from refusing to perform contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR or the use of a replacement;
- statement establishing that the legislative benchmark replacement is a commercially reasonable substitute for, and a commercially substantial equivalent to, LIBOR; and
- provision of a safe harbor from litigation for the use of the recommended benchmark replacement.
The ARRC acknowledged this important development in a related press release, describing the legislation as “crucial in minimizing legal uncertainty and adverse economic impacts associated with the transition.”
The timing is also propitious because the day before, on March 23, 2021, the Federal Reserve released a Progress Report (“Progress Report”) finding that there are approximately $2 trillion3 of potential “tough legacy” contracts—approximately $1.6 trillion in securitization transactions and $400 billion in other cash products. The Progress Report discussed4 the proposed New York legislation as an important part of addressing legacy products.
Our March 12, 2020 Legal Update US ARRC Proposes a New York State Legislative “Solution” for Legacy LIBOR Contracts Without Adequate Fallbacks—But What Does It Actually “Solve”? reviewed the proposed New York legislation and raised concerns regarding potential conflict with the unanimous consent requirements of the Trust Indenture Act (“TIA”).
The New York City Bar Association recently released a detailed Report on Legislation (“NYCBA Report”) in support of the enactment of the proposed New York legislation that also concluded that the law may violate the TIA5 (and supported federal action “to remove this concern”) and discussed the implicated Constitutional considerations.6
While there is more work to be done to resolve potential challenges, there is no doubt that the LIBOR Legislation is an important step in the process and may accelerate the approval of companion legislation at the federal level, which might not face the same potential inconsistencies with the TIA and which has the recent support of FRB Chair Jerome Powell.
1 The Senate bill is designated S297B, and the bill version passed by the Senate was adopted as A164B in the Assembly.
2 “Relevant Recommending Body” is defined in the LIBOR Legislation as “the Federal Reserve Board, the Federal Reserve Bank of New York, or the Alternative Reference Rates Committee, or any successor to any of them.”
3 See fn1 (on p.3), which states: “Of the estimated $90 trillion in USD LIBOR exposures outstanding beyond June 2023, the majority are derivatives which can be addressed through adherence to the ISDA Protocol. An estimated $1.9 trillion in exposures will remain in bonds and securitizations, many of which may have no effective means to transition away from LIBOR upon its cessation. See discussion around legislation and ‘tough legacy’ contracts below.”