On March 25, 2021, we published a brief article on the transition from the London Inter-Bank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR). This article contained a background on the LIBOR to SOFR transition, and a summary of the transition language recommended by the Alternative Reference Rates Committee (ARRC). It also summarized and discussed the implications of the announcements that were made on March 5, 2021 (the March 5th Announcements) by the ICE Benchmark Administration (IBA) and the Financial Conduct Authority (FCA). These announcements collectively confirmed the dates of the “trigger events” set out in the ARRC recommended transition language, being December 31, 2021 for the one-week and two-month US dollar LIBOR settings, and June 30, 2023 for the overnight and the one-month, three-month, six-month and twelve-month US dollar LIBOR settings.
On March 25, 2021, the ARRC released supplemental recommendations (the 2021 Hardwired Language) for its hardwired fallback language for bilateral and syndicated loan agreements which use US dollar LIBOR settings. Set out below is a brief summary of the key changes to the ARRC’s 2020 recommended hardwired fallback language (the 2020 Hardwired Language). The 2021 Hardwired Language is intended to simplify the language given the timing certainty provided by the March 5th Announcements.
Key changes: 2020 Hardwired Language vs. 2021 Hardwired Language
- Trigger Events. Following the March 5th Announcements, it became certain on which date each of the available US dollar LIBOR settings (or tenors) would no longer be published or representative. Accordingly, the ARRC has simplified the trigger events for actual transition to the “Benchmark Replacement.” The new recommended language addresses the replacement of US dollar LIBOR separately from other future benchmarks. Instead of the definitions of “Benchmark Transition Event” and “Benchmark Replacement Date” setting out the trigger event and effective date of the transition, the 2021 Hardwired Language now summarizes the facts of the March 5th Announcements and provides for the effectiveness of the transition from LIBOR to SOFR to be the earlier of (i) the date upon which all “Available Tenors” of LIBOR are no longer published or representative and (ii) the effective date of an early opt-in to the transition.
- Defined Terms. In order to further simplify the 2020 Hardwired Language, the ARRC has removed certain defined terms and have consolidated others in the 2021 Hardwired Language. For example, the defined terms “Benchmark Replacement Adjustment,” “Benchmark Replacement Date,” “Corresponding Tenor” and “Reference Time” have been removed and the defined terms “SOFR Administrator” and “SOFR Administrator’s Website” have been consolidated into the defined term “SOFR.”
- Daily Simple SOFR. For loans that transition from US dollar LIBOR to “Daily Simple SOFR,” the 2021 Hardwired Language creates certainty by specifying the applicable payment period and, correspondingly, the applicable spread adjustment. This language is incorporated in the section entitled “Benchmark Replacement Setting.”
- Benchmark Replacement. As mentioned above, the defined term “Benchmark Replacement Adjustment” has been removed in the 2021 Hardwired Language. In its place, the defined term “Benchmark Replacement” has been updated in two ways. First, it creates a two-step waterfall, with the first step being “Term SOFR” plus an adjustment, and the second step being “Daily Simple SOFR” plus an adjustment. Second, for each step it specifically sets out the spread adjustment values applicable to particular “Available Tenors” to make the “Benchmark” and “Benchmark Replacement” more comparable.
- Alignment with ISDA Documents. The pre-cessation language under the defined term “Benchmark Transition Event” has been amended in the 2021 Hardwired Language to more closely align with the drafting of “Index Cessation Event” in the standard documentation of the International Swaps and Derivatives Association.
Implications of the 2021 Hardwired Language
The 2021 Hardwired Language is not meant to substantively deviate from the 2020 Hardwired Language nor supersede it. Market participants who have already adopted the 2020 Hardwired Language do not need to amend their loan agreements to incorporate the changes implemented in the 2021 Hardwired Language because the effect of both versions will have substantially the same result. The supplemental recommendations simplify and eliminate aspects of the 2020 Hardwired Language based on the March 5th Announcements. Market participants who have not yet adopted LIBOR transition language in their loan agreements can refer to the 2021 Hardwired Language, which provides greater transparency into the fallback adjustments by including specific adjustment rates for specific tenors and removes excess language regarding “Benchmark Transition Events” as these events have already occurred.