June 21, 2023 - More than one third of institutional credit agreements still tied to LIBOR have hardwired fallback language and will transition to SOFR on the date the FCA announces that USD LIBOR is no longer representative (if not earlier). It is expected that the FCA will announce that USD LIBOR is no longer representative on Saturday, July 1^st. It is important to remember that this transition applies to new borrowings / interest rate resets under the credit agreement on and after such date, but not any then-outstanding Interest Periods/LIBOR contracts, which will continue on LIBOR until the next interest rate reset.

To administer Term SOFR, administrative agents will need to adopt conforming changes, those technical, operational or administrative changes needed to implement and administer Term SOFR. (The LSTA’s form of conforming changes is available here.) Special care must be paid to the effective date of those conforming changes. Hardwired fallback language, like the LIBOR Act itself, respects the LIBOR lookback in the contract that is used in an interest rate setting. So, where the relevant LIBOR lookback falls on a date on which panel LIBOR was still published on a representative basis, then that LIBOR rate will be used in that interest rate setting (so long as such a new borrowing or interest rate reset is permitted on such date).

Let’s look at an example. Assuming a LIBOR definition with a two London banking day lookback, the last date for new LIBOR borrowings or interest rate resets will be Monday, July 3^rd (which will use the LIBOR published two London banking days prior on Thursday, June 29^th). This is because while Tuesday, July 4^th is a London banking day (whereby such contract could lookback to LIBOR as published on Friday, June 30^th), the July 4^th date is a US holiday and therefore not a permitted borrowing or interest rate reset date. On and after Wednesday, July 5^th Term SOFR will be used for any such new borrowings or interest rate resets in such example.

Alternatively, where a LIBOR definition has a lookback that requires any such lookback day to be both a London banking day and a US business day, Wednesday, July 5^th will be the last date for new LIBOR borrowings or interest rate resets (which will use the LIBOR published on Friday, June 30^th). On and after Thursday, July 6^th Term SOFR will be used for any such new borrowings or interest rate resets in such alternative example. This means that conforming changes should be effective as of the relevant first permitted Term SOFR borrowing or interest rate reset date – not Friday, June 30^th.