October 18, 2022 - As we reported last week, the Alternative Reference Rates Committee (“ARRC”) recently released its Loan Remediation Survey and the takeaways are a mixed bag. Nearly all lenders have inventoried their LIBOR loans and have a remediation plan which is good, but it is also apparent that many borrowers and lenders expected most legacy LIBOR loans to be remediated through refinancings. Given the economic environment those plans may not come to fruition. This means that the relief market participants enjoyed once the USD LIBOR cessation date was pushed out to mid-2023 may have been misguided if the feared deluge of remediation transactions comes to pass just 18 months later. Indeed, where the conventional wisdom of the past two years has been that legacy loans would transition through refinance or bespoke amendments, that may prove more challenging than expected. In that case, we may see more LIBOR loans transition to Term SOFR via the hardwired fallback language in which conforming changes will need to be adopted by the relevant Administrative Agent. It is possible that we will see plans to adopt unconventional approaches to amendments resurrected. The idea of a “one size fits all”, generic amendment that could be used across some or all of a lender or administrative agent’s platform was largely abandoned once the extension to mid-2023 was announced. But, as the window closes on the time to approach amendments on a transaction basis, the idea may prove attractive once again.
In order to support our members in their remediation efforts the LSTA has prepared a set of forms of amendment designed for different remediation scenarios in two flavors – Term SOFR and Daily Simple SOFR. A summary of those forms is set forth below. The drafting approach to 1) and 2) below is to offer a generic, “one size fits all” amendment that serve as a blunt tool to remediate legacy contracts en masse. (Embedded links are to Term SOFR versions of the forms with links to the Daily Simple SOFR versions available at the end.)
- Conforming Changes Amendments via Hardwired Fallback Language: The Form of Conforming Changes Cover Amendment is a cover faceplate applicable to implement Benchmark Replacement Conforming Changes unilaterally (without borrower or lender affirmative consent) and is accompanied by Exhibit A/Operative Terms which contains the operative terms to implement Adjusted Term SOFR. It can be used either with an Amendment Approach Fallback (if another implementing document has been utilized to convey the replacement benchmark selection) or with a Hardwired Approach Fallback. It is executed only by the Administrative Agent and no consents are necessary.
- Streamlined Amendments via Amendment Fallback Language: The Form of Benchmark Replacement Amendment is an integrated form for usage with ARRC-style amendment approach provisions. It both selects the replacement rate of Adjusted Term SOFR (for an amendment approach) and incorporates, as an exhibit, the conforming changes necessary to implement the replacement rate. It is executed by the Administrative Agent, the Borrower and the Loan Parties, and is typically subject to negative consent of the Required Lenders. The Benchmark Replacement Cover Amendment plus the Exhibit A/Operative Terms together document the amendment to replace LIBOR with Term SOFR.
- No Fallback Language Amendments – The Form of Consensual Amendment would allow parties to attach a conformed, blacklined credit agreement as Exhibit A to change a benchmark rate. Our form serves as the “faceplate” for the operative terms of the amendment contained in the accompanying blacklined credit agreement. This can be used for a “standard” or “consensual” amendment (typically executed by the Administrative Agent, the Borrower, the Loan Parties and 100% of Lenders), and does not utilize standard fallback provisions. The form can be used to transition a LIBOR-referencing credit agreement to Term SOFR or Daily Simple SOFR.
Forms of Amendment (Daily Simple SOFR):
- Conforming Changes Cover Amendment accompanied by the relevant Exhibit A/Operative Terms
- Note: Standard Hardwired Approach Fallbacks identify “Term SOFR” as the first step of the waterfall in “Benchmark Replacement” so the instances in which this Conforming Changes Amendment can be used with a Hardwired Approach Fallback may be few.
- Benchmark Replacement Cover Amendment accompanied by the relevant Exhibit A/Operative Terms
- Note: Given the additional complexity of transitioning from a term rate to a daily rate, parties may be more hesitant to use this approach for a move to Daily Simple SOFR.
