ARRC Releases Updated LIBOR Fallback Language for USD Syndicated Loans
July, 2020 - Craig Unterberg, Gilbert Porter, Brian Sung, Neal Kaminsky
- The ARRC released an updated version of its recommended LIBOR fallback language for USD LIBOR syndicated loans on June 30, 2020.
- Among other updates, the updated fallback language recommends a “Hardwired Approach” to effect LIBOR replacement and removes the previous alternative recommendation for an “Amendment Approach.” The proposed waterfall of alternative reference rates has also been updated to include Daily Simple SOFR as the second alternative (after term SOFR).
- Market participants should note that the updated fallback language represents a proposed template, but the ARRC anticipates that institutions will use their own judgement in making adjustments or modifications to the proposed terms when updating their own agreements.
- As foreshadowed in the ARRC's document, market participants will want to independently evaluate the factors discussed in the ARRC’s recommendations, taking into consideration their own operational preferences, treasury financing practices, and market trends.
Discussion On June 30, 2020, the Alternative Reference Rates Committee (“ARRC”) released an updated version of its recommended reference rate fallback language for U.S. dollar (“USD”) LIBOR syndicated loans (“Updated Syndicated Loan Fallbacks”), intended to serve as a template for new originations in order to facilitate a smooth transition to an alternative reference rate.
The ARRC is a group of private-market participants and regulators initially convened in 2014 by the Federal Reserve Board and the Federal Reserve Bank of New York in anticipation of the expected phase-out of LIBOR based reference rates and the transition to the Secured Overnight Financing Rate (“SOFR”), the ARRC’s recommended alternative reference rate for USD financing markets1. The ARRC is working in parallel with similar efforts to facilitate transitions to new reference rates in other local currency jurisdictions, and with those being undertaken by the International Swaps and Derivatives Association, Inc. (“ISDA”) and its members in promulgating updates to reference rate replacement terms in standard documentation governing derivatives products.
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1 See The Alternative Reference Rates Committee, A User’s Guide to SOFR, April 2019.