On July 22, 2021, Representative Brad Sherman introduced H.R. 4616, the “Adjustable Interest Rate (LIBOR) Act of 2021” (the “Bill”) into the U.S. House of Representatives. The Act is before the House’s Committee on Financial Services, Committee on Ways and Means, and Committee on Education and Labor. On July 29, 2021, the House’s Committee on Financial Services voted to advance the Bill, along with certain technical amendments proposed by Representative Sherman. The version of the Bill approved by the Committee on Financial Services can be accessed here: Adjustable Interest Rate (LIBOR) Act of 2021 (Committee on Financial Services Version). The Committee on Ways and Means, and Committee on Education and Labor have yet to act on the Bill.
The Bill would preempt state laws such as those previously passed in New York and Alabama (except with respect to contracts referencing one-week or two-month USD LIBOR), with the goals of (i) establishing a clear and uniform process, on a nationwide basis, for replacing LIBOR in existing contracts, the terms of which do not provide for the use of a clearly defined or practicable replacement benchmark rate, and (ii) precluding litigation relating to such existing contracts upon LIBOR’s cessation. Thus, if the Bill is adopted (and continues to include preemption provisions), parties to contracts referencing USD LIBOR will need to look to the Bill, rather than any state legislation, in order to determine how they should perform under their contracts. In substance, however, the Bill closely resembles the earlier New York and Alabama laws. As a result, the effect of the Bill (in its current form) on a particular USD LIBOR contract likely would not differ significantly from the effect that the New York or Alabama laws would have had on such contract (although the Bill would apply in all 50 U.S. states, which is itself a significant difference from the New York and Alabama laws).
At a high level, the Bill would:
- With respect to U.S. law-governed contracts that do not contain USD LIBOR fallback provisions providing for the orderly transition to a suitable replacement rate, replace (by operation of law) USD LIBOR with a SOFR-based rate to be selected by the Federal Reserve Board (including the officially recommended spread adjustment) (such rate, the “Board-Selected Benchmark Replacement”);
- With respect to all U.S. law-governed contracts (including those that identify a “determining person” with the authority, right or obligation to select a replacement for USD LIBOR), prohibit litigation arising solely from the use of the Board Recommended Rate and implementation of any related “benchmark replacement conforming changes” to other terms and provisions of the applicable contract; and
- Provide for certain other continuity of contract and safe harbor provisions.
Similar to the earlier New York and Alabama laws, the Bill would not override existing contract language that specifies a non-LIBOR based rate as a fallback to LIBOR (e.g., the prime rate or the Federal Funds (Effective) Rate) and likely would not have a significant impact on legacy bilateral and syndicated business loans, which generally provide that if USD LIBOR is not available, an alternate base rate (such as the prime rate or Federal Funds (Effective) Rate) will be used under such contract. However, business loans of more recent vintages that require or permit parties to transition to a SOFR-based replacement rate would benefit from the Bill’s safe harbor provisions.
The Bill does contain a number of important differences from the New York and Alabama laws, including:
- The Bill would amend Section 316(b) of the Trust Indenture Act of 1939 (“TIA”) (which generally applies to debt securities sold pursuant to SEC registration statements and other contracts that specifically incorporate the provisions of the TIA) to clarify that transition from USD LIBOR to the Board Recommended Replacement Rate would not violate the provisions of such section.
- On the other hand, there is significant uncertainty regarding whether implementation of the New York and Alabama laws would be deemed to violate Section 316(b).
- Thus, the Bill would provide a major benefit (avoiding potential legal challenges to the legislation based on perceived conflicts with TIA Section 316(b)) that state laws could not provide.
- The Bill specifically states that it applies to equity securities, such as preferred stock. Because the Bill would apply nationwide, it would purport to address USD LIBOR transition issues for USD LIBOR-linked preferred stock governed by the laws of states that have not passed similar legislation (including Delaware), although it is not completely clear at this point how a federal law such as the Bill could effectively amend state law-governed articles of incorporation of corporations throughout the U.S.