Final Phaseout of LIBOR: Amending Legacy Instruments, Fallback Language, Applying SOFR and Spread Adjustments

All remaining U.S. dollar LIBOR tenors will end or become nonrepresentative on June 30, 2023. While LIBOR has generally been phased out for new originations, much of the U.S. loan market is still comprised of legacy transactions that remain tied to LIBOR. Finance counsel must understand the replacement rate landscape when amending loan documents.

The parameters for transitioning a LIBOR-based loan facility to an alternative benchmark vary across credit agreements. SOFR is now available in various forms, but the credit spread adjustment (CSA) added to SOFR is negotiable. Banks are not required to use SOFR, and some are considering alternatives, including "credit-sensitive" rates that include some measure of the cost of unsecured borrowing. Many credit agreements require the parties to agree on the choice of replacement benchmark, negotiate the inclusion of a CSA, and/or obtain affirmative or negative consent from a syndicate of lenders.

The Adjustable Interest Rate (LIBOR) Act, signed into law on Mar. 15, 2022, establishes a national framework for replacing LIBOR in contracts lacking adequate fallback provisions. The Federal Reserve recently promulgated rules to provide additional details necessary to implement the Act.

Amendment forms published by the Loan Syndications and Trading Association (LSTA) operate as a one-size-fits-all document that overrides existing LIBOR provisions with SOFR provisions contained in the forms. This approach is expedient but requires reading the existing LIBOR based instrument together with the separate LSTA document.

Listen as our authoritative panel discusses the timing and impact of the LIBOR phaseout, the use of SOFR and other alternative rates, and the remaining transition challenges. The panel will explain the new federal law and the "tough legacy contracts" to which it applies, and appropriate uses for the LSTA amendment forms.