The Alternative Reference Rates Committee (ARRC) released updated fallback language for new originations of U.S. dollar-denominated syndicated business loans that reference LIBOR and new variable-rate private student loans on June 30, 2020. The language is intended to address the disruption that could occur should the termination of LIBOR indeed occur at the end of 2021.
With respect to syndicated business loans that reference LIBOR, the updated fallback language recommends using simple daily Secured Overnight Financing Rate (“SOFR”) in arrears language, which, among other things, includes a more “permissive early opt-in trigger” to “allow parties involved in the loan to switch over to an alternative rate like SOFR before LIBOR is officially discontinued or determined to be unrepresentative.”
The ARRC also discussed its recommended proposals regarding spread adjustments for cash products that reference U.S. dollar LIBOR, as follows:
- “For cash products other than consumer products, the ARRC’s recommended spread adjustment will match the value of ISDA’s spread adjustments to U.S. dollar LIBOR. Given the special considerations due to consumer products and that the ARRC will include a 1-year transition period as part of its recommended spread adjustments for consumer products, the ARRC will further consider the most appropriate approach to the issue of methodology versus value for these specific product.”
- “For all cash products, in the event that a pre-cessation event is operative, the ARRC’s recommended 5-year historical median spread adjustments will be determined at the same time as the ISDA’s spread adjustments, which will be at the time of any announcement that LIBOR will or has ceased or will or has become no longer representative.”
ARRC was convened in 2014 by the Federal Reserve Board and the New York Fed to address risks associated with LIBOR and to help ensure a successful transition from U.S. dollar (USD) LIBOR to a more robust reference rate.
The ARRC release can be read in full here: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf