Cadwalader Advises ARRC on Recommended LIBOR Fallback Language for Bilateral Business Loans and Securitizations

May 31, 2019

Cadwalader advised the Federal Reserve's Alternative Reference Rates Committee (ARRC) in the drafting of recommended contractual fallback language for U.S. dollar LIBOR denominated bilateral business loans and securitizations.

The ARRC encourages voluntary use of this language in new contracts, with the aim of minimizing market disruption in the event that LIBOR is no longer available, which may occur by the end of 2021.

These new provisions are the latest step in the ARRC’s efforts to help address risks in contracts that reference LIBOR and also contributes to the larger transition plan for its recommended alternative reference rate, the Secured Overnight Financing Rate (SOFR).

Last month, the ARRC released recommended contractual fallback language for floating rate notes and syndicated loans, on which Cadwalader also advised.

While the ARRC’s recommended fallback language is designed for specific products, it also seeks general consistency by defining key terms, including: benchmark transition events; benchmark replacement; and benchmark replacement adjustment.

For further detail on the ARRC’s recommended fallback language for bilateral business loans and securitizations, read its full press release here.

Cadwalader’s LIBOR Preparedness Team is headed by partner Lary Stromfeld, who along with partners Jeff Nagle and Dave Burkholder, worked as drafting counsel for this fallback language. Cadwalader’s LIBOR Preparedness Team can be reached here.  

In 2018, Cadwalader was selected by ARRC to assist in guiding the post-LIBOR financial world in developing best practices for fallback language across all cash products. LIBOR, the London Interbank Offered Rate, is one of several “benchmark” interest rates used in over $400 trillion of financial transactions around the world, including derivatives, corporate and consumer loans, bonds and securitizations. Since 2012 global regulators have been concerned about the integrity of these benchmark rates. Over the past couple years, global regulators and market participants have stepped up efforts to transition away from these benchmark rates and to replace them with new rates that are more liquid and transparent. The effort to replace LIBOR is being coordinated in the US by the Federal Reserve.