The London Interbank Offered Rate's (Libor) regulator, the Financial Conduct Authority, and administrator, Intercontinental Exchange Benchmark Administration (ICE), on March 5, 2021, announced that the publication of the one-week and two-month U.S. dollar Libor (USD Libor) maturities and all non-USD Libor maturities would cease immediately after Dec. 31, 2021, with the remaining USD Libor maturities ceasing immediately after June 30, 2023. In the U.S., the Alternative Reference Rates Committee (the ARRC) identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Department of the Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.
Since ICE's announcement, the ARRC has published recommended fallback language for new issuances of a variety of debt instruments. Such fallback language seeks to provide interest rate provisions that will function upon discontinuation or loss of representativeness of Libor and promotes consistency in defining key terms such as benchmark transition events, benchmark replacement and benchmark replacement adjustments. Notwithstanding the foregoing, a notable amount of U.S. law governed contracts that reference Libor do not include "fallback language" (i.e., language intended to provide an alternative reference rate or otherwise address a permanent cessation of Libor) or such language may not be robust. If the transaction documents for these financial instruments contain language contemplating only a temporary cessation of Libor, or no fallback language at all, the operation of those instruments and their expected returns will likely experience material changes when the rates are discontinued.
On Dec. 15, 2021, the Florida Senate and the Florida House of Representatives introduced draft legislation (SB 1246 and HB 925, respectively) that addresses benchmark replacements for Libor for Florida law-governed contracts where no fallback language or insufficient fallback language is provided. This Holland & Knight alert provides a brief summary of Florida's proposed law (the Law).
Proposed Florida Legislation
Which Agreements Are Covered by the Law?
- The Law covers "any contract, security or instrument" governed by Florida law, including, without limitation, any contract, agreement, mortgage, deed of trust, lease, security (whether representing debt or equity, and including any interest in a corporation, a partnership or a limited liability company), instrument or other obligation (collectively, Covered Agreements).
How Will the Law Impact Covered Agreements?
- No fallback or fallback based on Libor. If a Covered Agreement that uses Libor as a benchmark either:
- contains no fallback provisions, or
- contains fallback provisions that result in a benchmark replacement, other than a "recommended benchmark replacement" (defined below) that is based in any way on any Libor value,
then, on the date on which a) the administrator of Libor permanently or indefinitely ceases to provide Libor or b) the regulatory supervisor for the administrator of Libor announces that Libor is no longer representative,
- the "recommended benchmark replacement" shall, by operation of law, replace Libor as the benchmark for such Covered Agreement
- "recommended benchmark replacement" means, with respect to any particular type of Covered Agreement, a benchmark replacement based on SOFR that must include any recommended spread adjustment and any benchmark replacement conforming changes that have been selected or recommended by a relevant recommending body with respect to such type of Covered Agreement
- Fallback based on quotations. If a Covered Agreement that uses Libor as a benchmark contains any fallback provisions that provide for a benchmark replacement based on or otherwise involving a poll, survey or inquiry for quotes or information concerning interbank lending rates or any interest rate or dividend rate based on Libor, those provisions shall be void and without any force or effect.
- Fallback selected by a party. If a Covered Agreement that uses Libor as a benchmark contains fallback provisions that permit or require the selection of a benchmark replacement that is a) based in any way on any Libor value or b) meant to be a commercially reasonable replacement for and commercially substantial equivalent to Libor, then
- the party with the right to select the benchmark replacement (the determining person) shall have the authority, but shall not be required, to select, on or after the occurrence of a "LIBOR discontinuance event" (as defined in the Law) the "recommended benchmark replacement" (defined above) as the benchmark replacement
What Is the Impact of Replacing the Benchmark with the "Recommended Benchmark Replacement" Pursuant to Any of the Above?
- Conforming changes. All benchmark replacement conforming changes that are applicable (in accordance with the definition in the Law of "benchmark replacement conforming changes") to such recommended benchmark replacement must become an integral part of such Covered Agreement by operation of law.
- No liability. No person shall have any liability for damages to any person, or be subject to any claim or request for equitable relief, arising out of or related to the selection or use of a recommended benchmark replacement or the determination, implementation or performance of benchmark replacement conforming changes and such selection or use of the recommended benchmark replacement or such determination, implementation or performance of benchmark replacement conforming changes shall not give rise to any claim or cause of action by any person in law or in equity.
- No amendment or prejudice. The selection or use of a recommended benchmark replacement or the determination, implementation or performance of benchmark replacement conforming changes may not be deemed to:
- be an amendment or modification of any Covered Agreement, or
- prejudice, impair or affect any person's rights, interests or obligations under or in respect of any Covered Agreement
- No impairment or discharge. None of: 1) a Libor discontinuance event or a Libor replacement date; 2) the selection or use of a recommended benchmark replacement as a benchmark replacement; or 3) the determination, implementation or performance of benchmark replacement conforming changes shall:
- be deemed to impair or affect the right of any person to receive a payment, or affect the amount or timing of such payment, under any Covered Agreement, or
- a) discharge or excuse performance under any Covered Agreement for any reason, claim or defense, including, but not limited to, any force majeure or other provision in any contract, security or instrument; b) give any person the right to unilaterally terminate or suspend performance under any Covered Agreement; c) constitute a breach of a Covered Agreement; or d) void or nullify any Covered Agreement
- By its terms, the Law does not alter or impair:
- any written agreement by all requisite parties that, retrospectively or prospectively, a Covered Agreement shall not be subject to the Law
- any Covered Agreement that contains fallback provisions that would result in a benchmark replacement that is not based on Libor, including, but not limited to, the prime rate or the federal funds rate
- any Covered Agreement as to which a determining person does not elect to use a recommended benchmark replacement or as to which a determining person elects to use a recommended benchmark replacement prior to the occurrence of a Libor discontinuance event, or
- the application to a recommended benchmark replacement of any cap, floor, modifier or spread adjustment to which Libor had been subject pursuant to the terms of a Covered Agreement
Florida's proposal follows New York and Alabama, which have passed similar legislation establishing a process to elect a reliable replacement to Libor in circumstances where the contract: 1) does not contain any fallback provisions, 2) relies on any Libor value to calculate an alternate rate, or 3) fails to identify a specific fallback rate or person with the authority to select such a rate.
On Dec. 8, 2021, the U.S. House of Representatives passed The Adjustable Interest Rate (LIBOR) Act, which provides a replacement interest rate for those loans, securities and other financial instruments which rely on Libor and will not be able to continue to function as originally intended after it is discontinued. The legislation has been narrowly tailored so that it will not affect Libor-based contracts which contain provisions that allow them to easily transition to a pre-agreed upon alternative interest rate. If it is signed into law, it would supersede and preempt the statutes passed in the states, including any law that may be enacted in Florida based on the proposal described herein or otherwise.