March 25, 2021 - Today the Alternative Reference Rates Committee (ARRC) published supplemental recommendations of abridged hardwired fallback language for both syndicated business loans and bilateral business loans. We explain why this is so useful below.
First, the time to adopt hardwired fallback language in LIBOR referenced loans is now! This is the message that was delivered in the joint supervisory guidance released by the banking regulators on November 30th and reiterated by Fed Vice-Chair Randy Quarles on Monday. Indeed, the adoption of robust fallback language is one of the criteria that will be considered in bank examiners’ assessment of banks’ transition plans. Given this backdrop and the slower adoption of hardwired fallback language in certain loan market segments, the ARRC Business Loans Working Group picked up its pen again to offer an abridged version of its 2020 fallback language for syndicated business loans and bilateral business loans to arm loan market participants with a simpler, more user-friendly set of language. It is the hope that offering the abridged language will further facilitate negotiations between lenders and borrowers and see broad acceptance of hardwired fallback language.
The abridged fallback language was made possible by the certainty we now have as to the LIBOR endgame. While uncertainty existed as to when and how LIBOR would end, hardwired fallback language needed to provide for myriad fallback scenarios given the flexibility and inherent complexity of business loans. The new, abridged fallback language used the certainty provided by the March 5th statements by the IBA and the UK FCA to simplify the 2020 language in some instances and fill in blanks in others thereby offering increased transparency into the fallback outcomes.
How does the abridged fallback language compare to the 2020 fallback language?
The abridged fallback language does not lead to a different substantive outcome than the 2020 fallback language but does include some notable refinements:
- The abridged fallback language addresses the replacement of USD LIBOR and the replacement of future benchmarks in separate operative provisions.
- Given that the “Benchmark Transition Event” has occurred, there was no longer the need to capture different possible trigger events for the replacement of USD LIBOR
- The spread adjustment values set on March 5th are written into the definition of “Benchmark Replacement” (obviating the need for a “Benchmark Replacement Adjustment” definition)
- Because it is anticipated that Daily Simple SOFR loans will have a single interest payment frequency, if the loan falls back to Daily Simple SOFR (the second step of the waterfall), the abridged fallback language defines the frequency and, importantly, the corresponding spread adjustment to be used. In the 2020 fallback language, these details were largely left to Benchmark Replacement Conforming Changes.
Have the 2020 recommendations been superseded?
No. The abridged fallback language is designed as a supplement to and not a replacement of the 2020 fallback language. However, the abridged fallback language explicitly contemplates the March 5th announcements in a way that the 2020 fallback language does not (and could not). To that end, parties who continue to use the 2020 fallback language will likely want to incorporate the impact of the March 5th statements going forward.
The new abridged hardwired fallback language is shorter, simpler and easier to digest. Because it is so straightforward, it should reduce confusion between counterparties and should be more easily adopted in negotiations with borrowers. In turn, this will help banks meet the bank examiners’ imperative that new LIBOR referenced loans should contain hardwired fallbacks.