With global governmental authorities increasingly encouraging financial transaction parties to ramp up their preparation for LIBOR cessation (or, better yet, move to a new benchmark!), we have observed that a number of our clients are beginning to incorporate LIBOR fallback language that broadly follows the Amendment Approach for syndicated loans recommended by the Alternative Reference Rates Committee of the New York Federal Reserve Bank (ARRC).
Our review of recent publicly filed credit agreements shows that seven agreements filed with the U.S. Securities and Exchange Commission in the past month have included fallback language that tracks the ARRC-recommended Amendment Approach. An agreement filed in early April—after the ARRC circulated its proposed recommendations for comment, but before it published its final recommendations—also followed the Amendment Approach, but in a more qualified way that allowed for a scenario in which Term SOFR does not develop timely or robustly enough.
We are not aware of any agreements implementing the ARRC’s Hardwired Approach.
This initial sampling appears to support a position that the ARRC reported in response to its syndicated loan consultation: that the Amendment Approach (versus the Hardwired Approach) is being favored until the market has better visibility into how successor rates and related spreads and mechanics develop, and how closely those rates and spreads align with similar fallback provisions for derivatives.
We expect market acceptance and governmental pressure to continue to prompt the inclusion of ARRC-recommended LIBOR fallback language in transaction documentation for various product categories.
Related Publication - The ARRC’s Final Fallback Language Recommendations for New LIBOR Syndicated Loans