If you have a credit facility based on the London Interbank Offered Rate (LIBOR), you may soon get a notice from your lender or the administrative agent on your credit facility saying that a “Benchmark Transition Event” has occurred. Here is what you need to know about what that notice really means.
ICE Benchmark Administration Announcement
On November 30, 2020, LIBOR’s administrator, the ICE Benchmark Administration (IBA), announced that it would consult on ceasing to determine one-week and two-month USD and all GBP, EUR, CHF and JPY LIBOR settings after the December 31, 2021, setting — and ceasing to determine all other USD LIBOR settings after the June 30, 2023, setting. On January 25, 2021, that consultation closed, and market participants believe that the IBA will likely issue a statement about that consultation imminently.
Moreover, the prevailing belief market is that the IBA (or its regulator, the United Kingdom’s Financial Conduct Authority (FCA)) will announce that it intends to cease LIBOR settings on the previously described schedule and that the FCA is satisfied that LIBOR can be ceased in an orderly manner.
What would such an announcement mean?
Exactly what this announcement may mean to you may depend on the language in your credit agreement. Much of the U.S. market has incorporated some version of the Alternative Reference Rates Committee (ARRC) model replacement language in credit agreements. The ARRC has two versions of that language: the hardwired approach (which specifies what the replacement benchmark will be based on a waterfall, setting forth three options depending on what will be reported in the market at the time of replacement) and the amendment approach (which provides a mechanism for an amendment process to be utilized to determine the replacement rate). While the amendment approach seemed to prevail in the market until the fourth quarter of 2020, the hardwired approach is more prevalent in recent deals.
ARRC Hardwired Approach
Such an announcement would constitute a Benchmark Transition Event for purposes of the ARRC’s LIBOR fallback language hardwired approach. Pursuant to the ARRC’s LIBOR fallback language hardwired approach, a Benchmark Transition Event triggers a requirement that the administrative agent in a syndicated deal or the sole lender in a bilateral deal provide prompt notice of the Benchmark Transition Event to the borrower and the other lenders, if applicable.
Assuming the substance of the announcement is as the market expects and that a particular loan document contains the ARRC’s LIBOR fallback language, borrowers with LIBOR-denominated loan documents should expect to receive such a notice of the Benchmark Transition Event shortly after the IBA/FCA announcement.
However, nothing more is triggered by the announcement in the ARRC’s LIBOR fallback language hardwired approach. That is, the credit agreement already has a mechanism for what the replacement will be and the notice is merely to let the borrower know that the administrator has announced a termination date.
ARRC Amendment Approach
Such an announcement would also be a Benchmark Transition Event for purposes of ARRC’s LIBOR fallback language amendment approach and would trigger the same notice requirement on behalf of administrative agents and sole lenders.
Additionally, for loan documents incorporating the ARRC’s LIBOR fallback language amendment approach for syndicated loans, upon the occurrence of the Benchmark Transition Event, the administrative agent and the borrower may begin negotiating an amendment to the loan documents, though such amendment cannot go into effect before a predetermined number of days (90 in the ARRC’s model language) prior to the actual cessation of LIBOR. Under the ARRC’s LIBOR fallback language amendment approach for bilateral loans, upon the occurrence of the Benchmark Transition Event, the sole lender may prepare an amendment to the loan documents, but that amendment cannot go into effect before a predetermined number of days (90 in the ARRC’s model language) prior to the actual cessation of LIBOR.
What would such an announcement not mean?
Such an announcement would likely not cause the benchmark interest rate under a loan document to reset immediately, assuming the applicable loan document contains the ARRC’s LIBOR fallback language.
ARRC Hardwired Approach
Under the ARRC’s LIBOR fallback language hardwired approach, the benchmark resetting mechanism is not activated until both a Benchmark Transition Event and its related “Benchmark Replacement Date” occur. Pursuant to the ARRC’s fallback language hardwired approach, the Benchmark Replacement Date occurs at the later of the public statement regarding LIBOR cessation and the date on which the benchmark administrator permanently or indefinitely ceases to publish all LIBOR tenors available under the loan documents.
ARRC Amendment Approach
As previously described, under the ARRC’s LIBOR fallback language amendment approach, upon the occurrence of the Benchmark Transition Event, the preparation of amendments may begin, but those amendments cannot be put into effect before a predetermined number of days (90 in the ARRC’s model language) prior to the cessation of LIBOR.
So when will LIBOR cease under a particular loan document?
As of now, it is anticipated that for loan documents that provide for only one-week, two-month and/or non-USD LIBOR settings (which is not very common in the U.S. loan market), the date of cessation will be December 31, 2021, and for loan documents that provide for any other USD LIBOR tenor (which is far more typical in the U.S. loan market), the date of cessation will be June 30, 2023.
So, while this would be one more indication that LIBOR will soon be gone from the market, the notice you may be getting shortly is still just one more step in the process.All scenarios referenced in this alert assume that a loan document contains the ARRC LIBOR fallback language, without change. Not all loan documents contain the ARRC LIBOR fallback language and many market participants have made modifications to the ARRC LIBOR fallback language if such language is included in an applicable loan document. Borrowers and lenders should consult their specific loan documents to determine exact requirements and should consult with counsel on these matters.