By: Mark Heimendinger & Ferran Arimon
On Friday, the end-date for the long-anticipated shift away from USD LIBOR was finally cemented, and this morning, the Alternative Reference Rates Committee (ARRC) confirmed that a “Benchmark Transition Event” has occurred under ARRC’s fallback language with respect to “all USD LIBOR settings.” The new Benchmark will now replace LIBOR on all USD LIBOR loans regardless of tenor so long as the relevant loan documents contain ARRC language. (ARRC’s Friday announcement can be found here, and this morning’s announcement found here.)
While 30-day US Dollar LIBOR will continue to be available through June of 2023 (given prior pronouncements), 30-day US Dollar LIBOR will be replaced on existing loans. In addition, Bloomberg has published fixed spread adjustments applicable to International Swaps and Derivatives Association (ISDA) contracts which include all tenors of US Dollar LIBOR. ISDA has further announced that the fallback spread adjustment published by Bloomberg is now fixed going forward as of the date of the announcement for all US Dollar LIBOR settings.
Under ARRC’s bilateral business loan language, the Benchmark Replacement is chosen based on the following definition (often referred to as the benchmark replacement waterfall):
“Benchmark Replacement” means, for any Interest Period, the first alternative set forth in the order below that can be determined by the Lender as of the Benchmark Replacement Date:
(1) the sum of: (a) Term SOFR or, if the Lender determines that Term SOFR for the applicable Corresponding Tenor cannot be determined, Next Available Term SOFR, and (b) the Benchmark Replacement Adjustment;
(2) the sum of: (a) Compounded SOFR and (b) the Benchmark Replacement Adjustment;
(3) the sum of: (a) the alternate rate of interest that has been selected by the Lender as the replacement for the then-current Benchmark for the applicable Corresponding Tenor [giving due consideration to (i) any selection or recommendation of a replacement rate or the mechanism for determining such a rate by the Relevant Governmental Body at such time or (ii) any evolving or then-prevailing market convention for determining a rate of interest as a replacement for the then-current Benchmark for U.S. dollar-denominated syndicated or bilateral credit facilities at such time] and (b) the Benchmark Replacement Adjustment;
provided that, in the case of clauses (1) and (2) above, such rate, or the underlying rates component thereof, is or are displayed on a screen or other information service that publishes such rate or rates from time to time as selected by the Lender in its reasonable discretion. If the Benchmark Replacement as determined pursuant to clause (1), (2) or (3) above would be less than zero, the Benchmark Replacement will be deemed to be zero for the purposes of this Agreement. “
The ARRC announcement comes off the heels of Friday’s statement from the ICE Benchmark Administration (IBA) that feedback from its December 2020 consultation confirmed the dates proposed to stop publishing the USD LIBOR on a representative basis. The UK Financial Conduct Authority specifically stated that the publication of LIBOR on a representative basis will cease for the one-week and two-month USD LIBOR contracts immediately after December 31, 2020. The publication of LIBOR on a representative basis will cease for the remaining USD LIBOR contracts after June 30, 2023.
The ISDA later announced that the statements from the UK Financial Conduct Authority constitute an “Index Cessation Event” pursuant to the IBOR Fallbacks Supplement (Supplement Number 70 to the 2006 ISDA Definitions) and the ISDA 2020 IBOR Fallbacks Protocol, and as such this event triggers a “Spread Adjustment Fixing Date” pursuant to the Bloomberg IBOR Fallback Rate Adjustments Rule Book.
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