September 24, 2018
Cadwalader’s work on behalf of the Federal Reserve’s Alternative Reference Rates Committee (ARRC) is fully under way, with the publication today of two Consultations regarding new issuances of Floating Rates Notes and new originations of Syndicated Business Loans.
The Consultations set forth proposed fallback language that covers the trigger events and the replacement benchmarks and spreads that would go into effect upon the discontinuation of LIBOR. A detailed explanation of the fallback provisions is included in each of the Consultations to help market participants respond to specific questions about the proposals.
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. For the first two Consultations, the firm advised ARRC on proposals for use by issuers of LIBOR-based Floating Rate Notes and by lenders and borrowers in Syndicated Business Loans, including the impact that the fallback provisions in derivatives would have under various circumstances.
“It is critical that new LIBOR-based transactions begin to include robust language that governs the likely cessation of LIBOR,” said Cadwalader partner Lary Stromfeld, who is leading the project. “The greatest challenge is developing fallback provisions that are as consistent as possible across multiple markets, while recognizing the unique needs and practices of each.”
Recognizing the differences between these products, the Consultations actually include three different fallback approaches -- one for floating rate notes and two for syndicated loans. For floating rate notes, the language specifies a “waterfall” of rates and spreads that will go into effect upon the occurrence of certain trigger events. For syndicated loans, a “hardwired” approach is similar to the floating rate notes’ approach, while a second approach uses loans’ flexibility to create a streamlined amendment process. The “amendment” approach could serve as an initial step toward a hardwired approach.
ARRC is seeking broad market feedback by November 8. Additional Consultations for securitization and bilateral loans are in development. Consultations for other products, including consumer loans, are also expected.
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. In the past year, 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, which is generally expected to cease publication by the end of 2021, is being coordinated in the US by the Federal Reserve.
Cadwalader’s LIBOR Transition Team is led by Stromfeld. Partner Jeff Nagle provided critical expertise on the syndicated loans Consultation.