May 24, 2021 - by Tess Virmani. With seven months left to go before LIBOR originations are expected to cease, fallback language has evolved once again as reported by Covenant Review last week. While noting the increase in the incidence of ARRC hardwired fallback language to about 60% of new institutional originations though April 2021, Covenant Review also unveiled a new feature which is starting to be introduced in some transactions. At least three of those transactions have included an additional early opt-in trigger (the “Other Rate Early Opt-In Trigger”) which permits the transition to replacement rates other than those set forth in the Benchmark Replacement waterfall in advance of the permanent cessation of USD LIBOR. The feature adopts the architecture of the ARRC Early Opt-in – the borrower and the administrative agent can elect to transition to a different rate as soon as USD-denominated syndicated credit facilities adopting alternative benchmarks are in the market. Covenant Review notes that the new feature would allow for the transition to a credit sensitive (or other) rate even if the alternative rate that causes the trigger to be invoked is a SOFR-based rate.

It is interesting to see this fallback language development in light of the growing interest in credit sensitive rates among loan market participants.  That growing interest evident not only in this development but more acutely in the first syndicated credit facility which came to market last week referencing a credit sensitive replacement of USD LIBOR. Duluth Holdings, a Wisconsin-based apparel retailer, executed a $150 million five-year revolving credit facility led by BofA (who is also the administrative agent) and Keybanc Capital Markets which references BSBY. The interest rate on the loan ranges from BSBY + 1.25-2.00%.

We will be keen to see if these emergent practices take hold more broadly.