September 6, 2018 - Are you ready to fallback? No, we’re not talking about daylight savings. The Alternative Reference Rates Committee (ARRC), the LSTA, the ABA and the ARRC’s business loans and CLOs working group have been working hard to develop “LIBOR Fallback Language” recommendations for syndicated loans and floating rate notes (FRNs).
Why are we doing this? The reality is that if LIBOR were to end tomorrow, the syndicated loan market doesn’t really have a workable mechanism to transition to a new rate. Yes, loans could ultimately go to Prime, and loans that have been done over the past 12 months generally have some type of expedited amendment process to transition to a new rate if LIBOR stopped being published. But, really, if thousands of loans had to be amended simultaneously, there potentially would be huge traffic jams and non-trivial market disruption.
And so, for this reason, the ARRC working groups have been developing more robust fallback language. The business loans working group has developed two models: i) an “amendment” approach, which is a more robust version of the amendment language currently being used to transition from LIBOR and ii) a “hardwired” approach, which lays out trigger to start the transition, a new rate (SOFR) and a compensatory spread (to capture the difference between LIBOR and SOFR), and which can be executed en masse without amendments.
And here is where you come in. The ARRC is going to release these two potential approaches in a market-wide consultation in late September. We are seeking robust and detailed feedback from lenders, investors, lawyers and borrowers on whether these approaches work, where the devils are in the details and which approach you likely would use. After collecting this feedback, the ARRC looks to release final fallback recommendations around year-end. We really hope to hear from you! For more information, please see our LIBOR page.