October 14, 2020 - With less than 450 days remaining until the end of 2021, the loan market’s focus on the transition away from LIBOR has increased considerably (and rightly so!). One of the best examples of that is the recent adoption of ARRC hardwired fallback language in certain syndicated loans. As the LSTA has extensively reported, hardwired fallback language represents a safer, more robust approach to the transition away from LIBOR. Indeed, the ARRC has recommended a best practice of including hardwired fallback language in all syndicated loan originations going forward. While hardwired fallback language should solve some of the issues facing the loan market, it is important to remember that many, many loans will still need to be amended in short order to replace LIBOR with a successor rate. Remarkably, with the expected traffic jam of amendments, the amendment approach holds considerable risk for both borrowers and lenders.
Recently, Covenant Review completed a survey of LIBOR fallback provisions in the CS Leveraged Loan Index. They reviewed a sample of 758 syndicated institutional loans, which were originated or amended between August 1, 2017 and September 30, 2020. (i.e., these are the loans that were done once parties knew that LIBOR was likely to end. LSTA analysis shows that there are $187 billion of loans in the S&P/LSTA Index that were originated prior to 4Q2017; we assume that these loans do not have dedicated LIBOR fallback language.) Thus, Covenant Review’s analysis offers an excellent picture into the current state of fallback language in relatively newly originated loans. Although only a few of the post-August 2017 deals had no fallback language (less than 8% of the sample) which is certainly very good news, only 0.4% of the sample have hardwired fallback language and will be able to transition away from LIBOR without a consensual amendment. A whopping 99.6% of the sample will need to be amended (with varying degrees of lender involvement). While not a surprising result given the loan market’s preference for the amendment approach to date, the result lays bare the massive undertaking required to amend that many loan transactions quickly. Digging deeper into the survey, 60% of the sample have the market standard language which provides that the administrative agent and borrower can select a new rate which is subject to the negative consent of majority lenders within at least five business days. In addition, just over 18% of the sample have the ARRC Amendment Approach language which includes the same architecture. Covenant Review importantly notes that within the 60% “negative consent” group, some deals also include one or more of ARRC features, i.e. an early opt-in trigger, a pre-cessation trigger, or an explicit reference to a spread adjustment. Together with the 11 deals that require affirmative consent of majority lenders, the above-mentioned 78% of the sample will need to follow the full amendment process (albeit with a reduced lender consent threshold) to transition away from LIBOR. Moreover, the 60 deals with no fallback language will need to be refinanced or amended with 100% lender consent to avoid falling back to Prime once LIBOR is no longer available. Finally, the survey showed that a significant minority of deals (about 12%) provide that the borrower and agent can select a replacement rate without a lender vote, although some of those deals would have that replacement rate be subject to negative lender consent if there is no prevailing market convention for a replacement rate.
The Covenant Review survey offers critical insight into the leveraged loan market as it stands today and the results underscore one of the principal arguments for adopting hardwired fallback language – executability. The LSTA is developing tools to help the market with the amendment task it is facing, but it is not readily apparent how that task can be completed in an undisruptive fashion. The takeaway is clear: Run, don’t walk to hardwired fallback language!