LSTA Publishes New Forms Of Term SOFR Amendments

• Published date: 28 June 2022
• Subject Matter: Finance and Banking, Financial Services
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Jeffrey Nagle

The LIBOR transition process continues to roll along. New transactions are (mostly) being closed without using LIBOR any more, and many legacy transactions are naturally transitioning when refinanced or renewed this year. However, a significant portion of the legacy loan market remains that will require active transition at or before LIBOR cessation on June 30, 2023. In order to help members think through the process, the LSTA has produced and distributed a series of amendment forms (LSTA membership required to access forms) that may be used by market participants as part of the LIBOR transition.

There are three basic ways to transition from a legacy LIBOR loan to a benchmark replacement rate. The first can be called a "Consensual Amendment." This is a standard, old-fashioned type of amendment - the parties to a transaction get together and all (typically this would require 100% lender vote) agree to modify an agreement to replace LIBOR with a replacement rate. The second is by operationalizing the ARRC-style "Amendment Approach." This would allow certain parties (typically the agent and the borrower) to select a new rate and, pursuant to an amendment, incorporate the new rate and mechanics necessary to implement it with a consent threshold that is typically lower than a Consensual Amendment (e.g., as long as 50% of the lenders do not object after a certain period of time). The third is by using the "Hardwired Approach." This method provides for a transition to a pre-agreed rate on a certain date, as long as such rate is available and administratively feasible.

However, it is important to remember that, even under the ARRC Amendment Approach or Hardwired Approach, the fallback provisions are only part of what is necessary in order to fully transition loan documentation into alternative rates. While standard fallback language may tell you what rate to transition to, and when, it almost never provides the actual mechanics to transition. For example, fallback language may instruct the parties that, upon LIBOR cessation, the interest rate under a loan will change to Term SOFR plus an ARRC-recommended spread. However, as an additional step, the loan agreement will need to be modified to insert the definitions and mechanics of the Adjusted Term SOFR rate (e.g., inserting definition of "Adjusted Term SOFR," deleting LIBOR references, modifying how "Interest Period" is used, changing the eurocurrency liabilities language, adding U.S. Government Securities...