May 2, 2019 - The past week has been big. After 10 months of work, the Alternative Reference Rate Committee (“ARRC”) released its recommended LIBOR fallback language for syndicated loans and floating rate notes. The LSTA co-chairs the ARRC Business Loans Working Group, was one of the drafters of the loan fallback language, and also has published an easy-to-read explanation of LIBOR fallbacks and a printable one-pager here (after login).
JP Morgan wasted no time in using fallback language, at least in the FRN space. According to Covenant Review, on April 29th – two business days after the release of the ARRC recommendations – JP Morgan filed a Prospectus Supplement for several FRNs using the ARRC fallback language. (And they priced an issuanceyesterday, so there’s confirmation the approach has market acceptance.) According to Covenant Review, and its very helpful blackline, the LIBOR replacement language closely follows ARRC’s recommendations. Importantly, the FRN language uses the “hardwired” approach whereby, upon LIBOR cessation or unsuitability, the benchmark transitions to a replacement rate using a “waterfall” approach. The first potential replacement is Forward Looking Term SOFR plus a spread adjustment; if that does not exist, then the replacement rate will be SOFR Compounded in Arrears plus a spread adjustment. (As the LSTA explains, while the ARRC’s FRN fallback recommendations focus exclusively on the Hardwired Approach, loans also can use an Amendment approach.)
Covenant Review observes that the quick adoption of the ARRC language for FRNs “is hopefully an indicator that the market will quickly move to a new standard…the ARRC’s recommendations are vastly superior to other formulations in the market and include significant protections for issuers and investors.”
So what’s next? Educating members on surviving LIBOR’s demise! LSTA staff are fanning out about the country to discuss the replacement of LIBOR. On Tuesday, April 30th, LSTA’s Meredith Coffey joined a panel at the Milken Global Conference to discuss “50 Ways to Leave Your LIBOR”. (Actually, just two ways – SOFR and Ameribor – were discussed.) On May 8th, the LSTA hosted a webcast to explain exactly how the ARRC’s LIBOR fallback language works for loans. On May 9th, LSTA’s Tess Virmani and LMA’s Kam Mahil discussed the “LIBOR Lowdown” at the LSTA and LMA Joint New York Conference. On May 10th, LSTA EVP Meredith joined a panel at PLI’s Leveraged Financing 2019 Conference, where LIBOR will be on the menu. On May 15th, LIBOR was covered in the “Risk” part of the discussion at the Sidley Austin/LSTA Chicago Leveraged Lending Seminar. On May 21st, LSTA’s Meredith Coffey moderated a LIBOR panel at IMN’s CLO and Loan Conference in NYC. And on May 22nd, LSTA’s Tess Virmani discussed LIBOR twice in Chicago: First at the Windy City Summit and second at Mayer Brown. And that is just May. June is filling with events as well. If you want – or, let’s be honest, need – to learn more about LIBOR and SOFR, please reach out to email@example.com, firstname.lastname@example.org or email@example.com.