As even most grandmothers now know, LIBOR – the world’s most important number – may end after 2021. For this reason, responsible loan market participants are preparing for a transition. Step One: Ensure you have robust and actionable LIBOR fallback language in your loans and CLOs. Step Two: Recognize that loans and CLOs likely will have slightly different fallback language, and prepare for the hopefully modest risks that raises. Below we flag potential differences so lenders can prepare.
LIBOR is somehow simultaneously both a pressing issue and a slow-motion market upheaval. A first step to avoiding the upheaval scenario is the development of fallback language across cash asset classes. (Fallback language answers the critical question “If LIBOR disappeared tomorrow, to what rate would my contract fall back?” Is it Prime? Is it SOFR? Is it the last fixed rate? Is it nothing?!)
On September 24th ARRC released a market consultation on LIBOR fallback contract language for new originations of LIBOR syndicated business loans. On Monday, the comment period closed and the next phase of work – crafting ARRC’s final recommendation based on the feedback received – is soon to begin. The LSTA intends to publish a preliminary analysis of the comments received once they are publicly available.
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