On June 30, the ARRC published a revised version of its hardwired fallback language for new US Dollar LIBOR-linked syndicated loans. Along with this updated language, the ARRC also updated its user’s guide, which contains guidance for market participants for the adoption of the refreshed fallback provisions.
The following key changes were introduced:
- The ARRC’s recommended benchmark replacement waterfall has been changed. It now provides for step 2 as being ‘Daily Simple SOFR’ as opposed to the previously recommended compounded SOFR in arrears. The ARRC recognises that this may cause concern amongst market participants who desire alignment with ISDA’s decision to use compounded SOFR in arrears as the preferred fallback. The ARRC notes that there is very little difference between ‘Daily Simple SOFR’ and compounded SOFR in arrears. For example, a loan with a ‘Daily Simple SOFR’ rate will still be hedgeable with compounded SOFR in arrears hedges. They also point out a key advantage in that operational risk will be minimised by the use of the already operationalised ‘Daily Simple SOFR’.
- A second key change addresses the position in many credit agreements that borrowings can be drawn in different interest rate tenors. The updated fallback language permits administrative agents additional flexibility, as they are now able to “turn off” certain tenors in the event that such rates permanently cease, or cease to be representative, prior to other available tenors. This is designed to prevent a situation where certain tenors are offered referencing LIBOR and others SOFR. In addition, the ‘Benchmark Transition Event’ definition now provides that the transition away from LIBOR will not occur until the last available US Dollar tenor rate that is available for borrowings under the credit agreement ceases, or ceases to be representative.
- The ‘Early Opt-in’ language has been broadened to allow earlier transitioning. This now permits the borrower and/or administrative agent to elect to trigger the transition from LIBOR prior to it ceasing or ceasing to be representative. The transition will then take effect on the sixth business day following the election, provided that lenders comprising the ‘Required Lenders’ (the definition of which is to be agreed by the parties) have not objected to the election in the preceding five business days.
Please contact any of the authors of this briefing or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.