LIBOR considerations for lenders and borrowers, …...2019/11/19 · FCA: U.K. Financial Conduct...

© 2019 Eversheds Sutherland (US) LLPAll Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Eversheds Sutherland (US) LLP and the recipient. Eversheds Sutherland (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit www.eversheds-sutherland.com.

LIBOR considerations for lenders and borrowers, including BDCs and private credit funds

Heading in the right direction

November 19, 2019Vlad Bulkin, James Cain,Cynthia Krus and Christina Rissler Eversheds Sutherland (US) LLP

Eversheds Sutherland PRIVILEGED AND CONFIDENTIAL

Cynthia Krus

Moderators and presenters

Executive PartnerWashington, DC

Vlad Bulkin

PartnerWashington, DC

James Cain

PartnerWashington, DC

2

Christina Rissler

PartnerAtlanta

+1 [email protected]




Where do we start?

LIBOR transition quizWhere do we start?

Who is he and why is he important?(a) a Democratic presidential candidate (b) Andrew Bailey of the UK Financial Conduct Authority(c) Tom Hayes formerly of UBS and Citigroup

4

LIBOR transition quizWhere do we start?

Which one of these things is not like the others?

Is the answer:(a) €STER (b) AMERIBOR (c) TONA?

5

€STERAMERIBORSARONSOFRSONIATONA

LIBOR transition quiz: opinion pollWhere do we start?

LIBOR transition will most closely resemble which of the following?

(a) Y2K

(b) EURO

(c) BREXIT

6

Why transition?

Why do we not know how much time we have left?Why transition?

─ FCA: U.K. Financial Conduct Authority• June of 2017, the FCA released a consultation setting out the

source of its authority to compel submission and asking for input on how it might go about doing so

• July of 2017, the FCA announced it would not use its authority to compel LIBOR panel banks submissions after the end of 2021

• November of 2017, the FCA announced that the LIBOR panel banks had voluntarily agreed to remain on the panel until the end of 2021.

• March of 2018, the FCA put out a paper in response to the original consultation on how it would go about compelling banks to submit if it had to do so prior to the end of 2021

─ “No longer representative”

8

Why is it relevant?Why transition?

─ Potential for contract default or frustration

─ Continued effectiveness of hedges

─ Market adoption of alternative risk-free rates and diminished LIBOR transaction liquidity• Viability of alternative risk-free rate

─ Lack of forward-looking term rates• Based on actual term transactions referencing overnight rates

─ Capital impacts

─ Accounting and tax issues in relation to the transition to an alternative risk-free rate and the transition of legacy contracts

─ Securities, commodities, banking, insurance and consumer protection law ramifications

─ Avoidance of disputes, including litigation

9

Evolving issuesLIBOR transition

─ Development of a forward SOFR term curve• Lack of forward-looking term rates based on actual term transactions referencing

overnight rates

─ SOFR/LIBOR basis spread and term adjustments

─ Potential transition disconnect between assets, liabilities and derivatives• How to harmonize fallback methodology across asset classes and within asset classes

and how to ensure that your hedges remain effective if there are discrepancies between the triggers and fallbacks for various asset classes and/or derivatives?

─ “Big Bang” or phased transition? • ISDA is planning a Big Bang approach

─ Implementation of the compounded setting in arrears approach• Potential solutions: delayed payment, lookback or lockout, majority favors two-

banking-day backward-shift

─ Pre-cessation trigger upon an official announcement by the FCA that LIBOR is no longer representative• ISDA is currently considering whether to include a pre-cessation trigger in its fallback

language

─ Market adoption of alternative risk-free rates and diminished LIBOR transaction liquidity• Viability of alternative risk-free rate

10

Two years later, how are we doing?Why transition?

11

Sou

rce:

ISD

A S

wap

sinf

oW

eekl

y Ana

lysi

s: W

eek

endi

ng N

ovem

ber

15,

2019

Two years later, how are we doing?Why transition?

12

Sou

rce:

ISD

A S

wap

sinf

oW

eekl

y Ana

lysi

s: W

eek

endi

ng N

ovem

ber

15,

2019

Comparison of SOFR and LIBORWhy transition?

13

LIBOR SOFRForward-looking/term Backward looking/overnight

Established (30 years+) New as of April 2018

Survey + $500 million of daily trading $1 trillion of daily trading

Unsecured Secured

Available for five currencies Only for US$

Hypothetically reflects bank cost of funds

Risk-free rate

Rises in a market disruption/time ofincreased credit risk

May stay the same or even fall in a market disruption/time of increased credit risk

Variations of SOFRWhy transition?

SOFR: Secured Overnight Financing Rate

─ Daily SOFR – backward-looking, overnight rate• Each business day, the Federal Reserve Bank of New York publishes the SOFR on

its website at approximately 8:00 a.m. eastern time (although it can be adjusted up until 2:30 p.m. eastern time). SOFR is calculated using a combination of three Treasury repo rates with a total daily trading volume of around US$1 trillion

─ Term SOFR — forward-looking term SOFR for a tenor • has to be extrapolated from SOFR futures trading which is not deep, liquid,

transparent and historical enough at this point to meet IOSCO requirements

─ Simple SOFR vs. SOFR Compounded — simple averaging may be operationally easier, but compounded averaging (adding daily accrued interest back into principal amount) is a more accurate reflection of time value of money

─ SOFR in advance vs. SOFR in arrears — in advance looks back at average of rates during previous applicable period (so rate known in advance, but stale); in arrears looks at rates during applicable period (so rate not known until end of period) • ISDA has selected SOFR Compounded in Arrears for derivatives

14

SOFR formulas Why transition?

SOFR: Secured Overnight Financing Rate

15

Wheredb = the number of business days in the interest perioddc = the number of calendar days in the interest periodri = the interest rate applicable on business day ini = the number of calendar days for which rate ri applies (on most days, ni will be 1, but on a Friday it will generally be 3, and it will also be larger than 1 on the business day before a holiday). This can also be stated as the number of calendar days from and including business day i to but excluding the following business dayN = the market convention for quoting the number of days in the year (in the United States, the convention for money markets is N = 360, while in the UK it is N=365)And i represents a series of ordinal numbers representing each business day in the period

SOFR indexWhy transition?

The SOFR index is a compounding sequence that allows investors to calculate compounded SOFR averages over custom time periods. To calculate the compounded SOFR average between any two dates within the SOFR publication calendar, one would only need to input the SOFR index values on those dates into the following formula:

Where:─ x = start date of calculation period─ y = end date of calculation period─ dc = the number of calendar days in the calculation period

16

Evolving issues – SOFR competitorsWhy transition?

17

─ ICE US$ Bank Yield Index (US$ IBYI)• Developed by ICE Benchmark Administration (IBA)• US$ primary market wholesale, unsecured funding transactions for large, internationally

active banks (e.g., inter-bank deposits, institutional certificates of deposit and commercial paper) and US$ secondary market transactions in wholesale, unsecured bonds issued by large, internationally active banks. One-month, three-month an six-month term

• IBA may start publishing US$ IBYI in the first quarter of 2020

─ Ameribor®: American Interbank Offered Rate• Is disseminated by the American Financial Exchange LLC (AFX)

• The AFX is a self-regulated exchange that provides a transparent, centralized and rules-based electronic marketplace to allow for small and mid-sized American banks to meet their interbank funding needs

• Is a market-based benchmark interest rate for borrowing and lending between AFX 157 Members

• Members include small and mid-sized banks and non-bank financial institutions such as broker-dealers, insurance companies, private equity firms, hedge funds, futures commission merchants, asset managers and finance companies

• Is the daily volume-weighted average rate of the transactions in the overnight unsecured loan market on AFX platform (US$1.8B average daily volume in second quarter of 2019)

What is our time table?Why transition?

18

ARRC Paced Transition Plan

Who is on the ARRC?Alternative Reference Rate Committee (“ARRC”)

ARRC has broad participation across the financial services industry and representation from the official sector (ARRC members)

19

ARRC

9 9 7

10 3 3

Industry associations Banks Asset Managers, Insurers

& Other End Users

Official Sector (ex officio)

Financial Exchanges

Gov.-Sponsored Enterprises

25+ Industry associations 50+ Banks & Fin.

Service Firms

20+ Fin. Infrastructure & Consulting Firms 20+ Industry

Associations

ARRC Working Groups (includes members and non-members)

https://www.newyorkfed.org/arrc/about#members

What is being done?

Derivatives documentation issues related to transitionWhat is being done?

ISDA: International Swaps and Derivatives Association, Inc.

• ISDA Benchmarks Supplement• Contractual supplement to derivatives trading documentation that

amends 2006 ISDA Definitions• Includes “triggers” and “fallbacks” for determining the replacement to a

benchmark rate• Can be agreed to on a bilateral basis or via an ISDA Protocol

• Parties can opt to have the Supplement apply to legacy transactions

• Amendment to the 2006 IBOR Definitions and related Protocol for legacy transactions• Amendments include new triggers and fallbacks for USD LIBOR and other

IBORs and will apply on a going-forward basis to transactions that incorporate the 2006 Definitions

• First fallback is expected to be compounded SOFR in arrears plus a spread• Can also amend documentation, including Schedules and CSAs, for legacy trades that

use either the 2006 or 2000 Definitions via an ISDA Protocol

• Consultations on fallbacks, pre-cessation and final parameters, including spread methodology and mechanics of applying an “in arrears” rate

21

Proposed solutions for derivativesWhat is being done?

─ ISDA is in the process of amending its 2006 Definitions to include new triggers and fallbacks for USD LIBOR and other IBORs

• Triggers require permanent cessation of LIBOR as evidenced by a public statement by or on behalf of the benchmark administrator or regulator of the administrator

• ISDA consultation requested market input on “soft” or “pre-cessation” trigger in light of FSB request

• Fallback has yet to be finalized, but is likely to be SOFR applied in arrears on a compounded basis

• ISDA has published the results of its most recent consultation on credit and term differences (including mechanics of applying an “in arrears” rate). A majority of respondents (61%) preferred an implementation of the spread methodology based on a historical five-year median approach and for the compounded setting in arrears rate, a majority (56%) favored a two-banking-day backward-shift adjustment for operational and payment purposes.

• Amendments will apply on a going-forward basis to transactions that incorporate the 2006 Definitions

• Can also amend documentation, including Schedules and CSAs, for legacy trades that use either the 2006 or 2000 Definitions via an ISDA Protocol

─ CFTC Market Risk Advisory Committee (MRAC)• Publication of a standard set of disclosures that market participants may use

with all clients and counterparties with whom they continue to transact derivatives referencing LIBOR and other IBORs

22

ISDA – draft fallback languageWhat is being done?

23

ISDA triggers (IBOR fallbacks and Benchmarks Supplement) ISDA IBOR fallbacks ISDA Benchmarks Supplement

fallbacks

Permanent Cessation Trigger (LIBOR specific)Adjusted SOFR (which includes a spread relating to USD LIBOR and will be compounded in arrears)

Rate as agreed between the parties plus any payment or spread adjustment

Uncertainty regarding a Pre-Cessation Trigger (LIBOR specific)

Rate (inclusive of any spreads or adjustments) recommended as the replacement for SOFR by the Federal Reserve Board and/or the Federal Reserve Bank of new York (or by a committee officially endorsed or convened by the Federal Reserve Board and/or the Federal Reserve Bank of new York )

Rate previously nominated by the parties plus any payment or spread adjustment

No Early Opt –In Election (LIBOR specific)

Daily Overnight Bank Funding Rate (OBFR) (which includes the spread applied to Adjusted SOFR and will be compounded in arrears)

Substantially equivalent benchmark nominated by the administrator or by a central bank or officially endorsed working group or committee plus any payment or spread adjustment

Administrator/Benchmark trigger (only for the ISDA Benchmarks Supplement)

Short-term interest rate target set by the Federal Open Market Committee (FOMC) (which includes the spread applied to Adjusted SOFR and will be compounded in arrears)

A benchmark nominated by the Calculation Agent plus any payment or spread adjustment (otherwise, no fault termination applies)

Disclosure issues relating to the transitionWhat is being done?

─ US Securities and Exchange Commission Released a Staff Statement on LIBOR Transition on July 12, 2019 that encouraged market participants to make appropriate disclosures of material exposure to LIBOR and the type of activities that market participants should engage in to manage such risk

• The Staff Statement points to a number of existing rules or regulations that may require disclosure related to the expected discontinuation of LIBOR, including in the sections of public disclosure documents related to:

• risk factors (Item 105 of Regulation S-K), • management’s discussion and analysis of financial condition and results of

operations (Item 303 of Regulation S-K),• Board’s role in risk oversight (Item 407(h) of Regulation S-K), and • financial statements.

24

Disclosure issues relating to the transitionWhat is being done?

─ Additionally, the SEC Staff Statement provides guidance regarding disclosures that companies should consider when informing investors about the anticipated material impact LIBOR’s discontinuation may have on the company. Such disclosures include:

• A disclosure of the status of company efforts to date, and any significant matters that the company will address during future reporting periods;

• A disclosure of the fact that the company has determined that a material exposure to LIBOR exists, but that it cannot yet predict the expected impact of such exposure; and

• A disclosure of information that is used by management and the board of the company to determine the impact the transition away from LIBOR may have on the company, i.e., the notional value of legacy contracts referencing LIBOR

─ Sample Recent SEC Comment on a BDC’s Risk Factors:• Please tailor the disclosure on how the transition from LIBOR could affect the BDC’s

investments. For example, will the BDC invest in instruments that pay interest at floating rates based on LIBOR that do not include “fall back provisions” that address how interest rates will be determined if LIBOR stops being published? If so, how will it affect the liquidity of those investments? Also, disclose how the transition to a successor rate could impact the value of investments that reference LIBOR

25

New York law solution issues related to transition What is being done?

─ The Federal Reserve Bank of New York and the ARRC are reportedly considering asking New York Legislature to adopt legislation that would apply to certain types of contracts referencing LIBOR

─ Ideally, use of officially endorsed alternative reference rate (e.g., SOFR) plus spread, recommended by ARRC or ISDA, in lieu of LIBOR would offer safe harbor protection and defense to suit as “substantial performance” under documents governed by New York law

─ The scope of contracts this solution would cover is still to be determined, but likely targets are securitizations and floating rate notes due to amendment difficulties

─ Possible Issues:• Scope (Only New York law governed documents, may not cover more easily amended

cash products such as bilateral deals)• Constitutional challenges (Contracts clause, Takings clause)• No such statute proposed to date (New York Legislature is not currently in session)

26

Accounting issues related to transitionWhat is being done?

─ FASB published an exposure draft on September 5, 2019, proposing relief toease the burden in accounting for reference rate reform. Comments weredue October 7, 2019

─ If adopted, the amendments proposed in the FASB Exposure Draft wouldbecome effective upon the issuance of a final update and would remain ineffect until December 31, 2022, for new and existing contracts and hedgingrelationships

─ The exposure draft provides relief by allowing reference-rate modifications tobe classified as a continuation for accounting purposes• Applies to contracts that reference LIBOR or another IBOR that will, or is

anticipated to, cease to exist and for which the contract modifications areeither essential to or related to the replacement of such interest ratebenchmark

─ The proposed relief would allow hedging relationships to continue despitecertain changes being made in the critical terms of an existing hedgingrelationship due to reference rate reform

27

Tax concerns relating to transitionWhat is being done?

— On October 8, 2019, the Department of the Treasury and the Internal Revenue Service released proposed regulations providing guidance on the US federal income tax consequences of changing reference rates in debt and non-debt instruments (e.g., swaps) to rates other than existing IBORs

— The proposed regulations are generally consistent with expectations and provide that replacing LIBOR with a “qualified rate” (including adding such rate as a fallback rate) will not be treated as a modification of an existing instrument

— The proposed regulations will also simplify the tax disclosure provided to prospective investors, counterparties or customers in connection with the transition with respect to such modifications

28

What is ARRC recommending?

Loan documentation relating to transitionWhat is ARRC recommending?

ARRC: Fallback language (2019)

But what about everything else: (i) SOFR as part of Base Rate Definition? Breakage? Rate floors?

LSTA: Compounded SOFR in Arrears Concept Document (October 2019)

LMA: Loan Market Association

• (i) Fallback language (2014)

• (ii) Compounded SONIA based sterling term and revolving facilities agreement (September 2019)

• (iii) Compounded SOFR based dollar term and revolving facilities agreement (September 2019)

30

What options did the ARRC give us for fallback language?What is ARRC recommending?

31

Syndicated Loans

April 25, 2019

Bilateral Loans

May 31, 2019

Floating Rate Notes

April 25, 2019

SecuritizationsMay 31, 2019

New Closed-End,

Residential Adjustable

Rate MortgageNovember 15,

2019

Hardwire Approach

Hardwire Approach

Hardwire Approach

HardwireApproach

Hardwire Approach

Amendment Approach

Amendment Approach

Hedged Loan Approach

Triggers – overviewWhat is ARRC recommending?

32

Syndicated Loans -Amend

Syndicated Loans -

Hardwire

Bilateral Loans -Amend

Bilateral Loans -

Hardwire

Bilateral Loans –Hedged

FRN Securitization

New Closed-End, Residential Adjustable Rate

Mortgage

Permanent Cessation Trigger (LIBOR specific)

Permanent Cessation Trigger

Permanent Cessation Trigger (LIBOR specific)


Index-cessation date for benchmark per ISDA




Pre-CessationTrigger (LIBOR specific)

Pre-CessationTrigger

Pre-CessationTrigger (LIBOR specific)





Early Opt–In Election (LIBOR specific)




Asset Replacement Trigger

Triggers – common groundWhat is ARRC recommending?

─ Benchmark Transition Event – the event that initiates a transition from the current Benchmark to the Benchmark Replacement• Permanent Cessation Triggers

• A benchmark administrator announcing that the administrator has or will cease to provide the benchmark permanently or indefinitely

• The benchmark administrator's regulator announcing that the benchmark administrator has or will cease to provide the benchmark permanently or indefinitely

• Pre-Cessation Trigger (aka Zombie LIBOR Trigger)• A benchmark administrator's regulator publicly stating that the

benchmark is no longer representative

{Note that the New Closed-End ARM Recommendation uses different wording for these triggers than the four other recommendations}

33

Triggers – variations: early opt-inWhat is ARRC recommending?

─ Early Opt-in Election – Syndicated Loans – Hardwire• A notification by the Administrative Agent (or the request by the Borrower to

notify) each of the other parties that at least [5] currently outstanding US$ syndicated credit facilities contain (as a result of amendment or as originally executed) as a benchmark interest rate, in lieu of LIBOR, Term SOFR plus a Benchmark Replacement Adjustment (and such syndicated credit facilities are identified in such notice and are publicly available for review) or

• The joint election by the Administrative Agent, the Borrower and the Required Lenders to declare that an Early Opt-in Election has occurred and the provision of notice

─ Early Opt-in Election – Syndicated Loans – Amendment• A determination by the Administrative Agent or the Required Lenders that US$

syndicated credit facilities being executed at such time, or that include similar amendment fallback language, are being executed or amended to incorporate a new benchmark interest rate to replace LIBOR, or

• The election by the Administrative Agent or the Required Lenders to declare that an Early Opt-in Election has occurred and the provision of notice

• But, (i) Benchmark Replacement is selected by the Administrative Agent and the Borrower and (ii) an Early Opt-in Election amendment under the Amendment Approach is not effective until the Required Lenders give written notice of acceptance

34

Triggers – variations: early opt-in (con’t)What is ARRC recommending?

─ Early Opt-in Election – Bilateral Loans• A determination by the Lender that at least [5] currently

outstanding US$ syndicated or bilateral credit facilities at such time contain (as a result of amendment or as originally executed) as a benchmark interest rate, in lieu of LIBOR, …

• Hardwire … [Term SOFR plus a Benchmark Replacement Adjustment [(and such credit facilities are identified in the applicable Rate Election Notice and are publicly available for review)], or]

• Amendment … [a new benchmark interest rate to replace LIBOR, or]• The election by the Lender to declare that an Early Opt-in Election

has occurred and the provision of notice• But, if an Early Opt-in Election is made, both the Bilateral Loan Hardwire

Approach and the Bilateral Loan Amendment Approach include optional language that if selected would give the Borrower a negative consent right with respect to the Benchmark Replacement for [5][10] Business Days from the date of provision of notice by the Lender

35

Triggers – variations: early opt-in (con’t)What is ARRC recommending?

─ Securitizations - has an extra optional permanent cessation trigger• Asset Replacement Percentage is greater than [50]%, as reported in most recent

servicer report• Asset Replacement Percentage = the outstanding principal balance of the assets that

were indexed to the Benchmark Replacement to the outstanding principal balance of all assets

─ Bilateral Business Loans – Hedged Loan Approach – has only one trigger• The occurrence of an index cessation date with respect to the then-current Benchmark

upon which the then-current Benchmark for the applicable tenor would be replaced in derivatives transactions referencing the ISDA Definitions

─ Syndicated Loans and Bilateral Business Loans – Amendment Approach• Amendment Approach allows amendments triggered by a prospective public statement

or publication of information to be effective up to [90] days prior to the expected event

• Amendment Approach uses the same triggers as the Hardwire Approach but has not been “future-proofed”, meaning the language makes LIBOR specific references

36

Benchmark replacement – overviewWhat is ARRC recommending?

37

Syndicated Loans -Amend

Syndicated Loans -

Hardwire


Bilateral Loans -

Hardwire


FRN Securitization

New Closed-End,


Rate Mortgage

Borrowerand Agent select

Term SOFR (a) same term, (b) next available term

Lenderselects [Borrower negative consent]

Term SOFR(a) same term, (b) next available term

ISDAFallback Rate

Term SOFR Term SOFRARRC selects for consumer products

Compounded SOFR

Compounded SOFR

Compounded SOFR

Compounded SOFR

Noteholder selects

Borrower and Agent select


ARRC selects ARRC selects

ISDA Fallback Rate

ISDA Fallback Rate

Issuer or its designee selects

[Designated Transaction Representative selects]

Benchmark replacement: syndicated loans and bilateral loansWhat is ARRC recommending?

─ Hardwired Approach: • Waterfall

• (1)(a) Term SOFR for corresponding tenor (that is displayed on a screen or published)

• (1)(b) Next available Term SOFR (that is displayed on a screen or published)

• (2) Compounded SOFR (that is displayed on a screen or published)

• (3) Alternative Rate selected by [Administrative Agent and Borrower][Lender]

• Giving due consideration to (i) any selection or recommendation of a replacement rate or the mechanism for determining such a rate by the Relevant Governmental Body at such time or (ii) any evolving or then-prevailing market convention for determining a replacement rate for the current Benchmark for US$ syndicated [or bilateral] credit facilities at such time

• If the Alternative Rate is selected pursuant to the waterfall, the Required Lenders have a negative consent right for the five Business Days after notice is provided to the Lenders

38

Benchmark replacement: syndicated loans and bilateral loans (con’t)


─ Amendment Approach: • Alternative Rate selected by [Administrative Agent and

Borrower][Lender]

• Giving due consideration to (i) any selection or recommendation of a replacement rate or the mechanism for determining such a rate by the Relevant Governmental Body at such time or (ii) any evolving or then-prevailing market convention for determining a replacement rate for the current Benchmark for US$ syndicated [or bilateral] credit facilities at such time

• The Required Lenders have a negative consent right for the 5 Business Days after notice is provided to the Lenders

─ Hedged Approach: • Successor rate for derivatives transactions referencing the ISDA

Definitions

39

Benchmark replacement adjustment – overviewWhat is ARRC recommending?

40

Syndicated Loans - Amend

Syndicated Loans -

Hardwire


Bilateral Loans -

Hardwire


FRN Securitization

New Closed-End,


Rate Mortgage

Borrower and Agent select ARRC selects


ARRCselects

ISDA Fallback Adjustment

ARRCselects ARRC selects

ARRC selects for consumer products


ISDAFallback Adjustment

ISDAFallback Adjustment


Noteholder selects

Borrower and Agent select


Issuer or its designee selects

[Designated Transaction Representative selects]

Benchmark replacement adjustments: syndicated loans and bilateral loans


─ Hardwired Approach:• Rate + Benchmark Replacement Adjustment

• Term SOFR or Compounded SOFR –

Waterfall:

• Selected or recommended by the Relevant Governmental Body (that is displayed or published on a screen)

• That would apply to the fallback rate for a derivative transaction referencing the ISDA Definitions (that is displayed or published on a screen)

• Alternative Rate –

• Selected by [Administrative Agent and the Borrower][Lender] [giving dueconsideration to (i) any selection or recommendation of a spread adjustment, ormethod for calculating or determining such spread adjustment, for the replacement ofthe then-current Benchmark with the applicable Unadjusted Benchmark Replacementby the Relevant Governmental Body at such time or (ii) any evolving or then-prevailingmarket convention for determining a spread adjustment, or method for calculating ordetermining such spread adjustment, for the replacement of the then-currentBenchmark with the applicable Unadjusted Benchmark Replacement for US$ syndicated[or bilateral] credit facilities at such time]

• Due consideration language is only bracket in Bilateral Loans Language

41

Benchmark replacement adjustments: syndicated loans and bilateral loans (con’t)


─ Amendment Approach:• Alternative Rate –

• Selected by [Administrative Agent and the Borrower][Lender] [giving due consideration to (i) any selection or recommendation of a spread adjustment, or method for calculating or determining such spread adjustment, for the replacement of the then-current Benchmark with the applicable Unadjusted Benchmark Replacement by the Relevant Governmental Body at such time, or (ii) any evolving or then-prevailing market convention for determining a spread adjustment, or method for calculating or determining such spread adjustment, for the replacement of the then-current Benchmark with the applicable Unadjusted Benchmark Replacement for US dollar-denominated syndicated or bilateral credit facilities at such time]

• Due consideration language is only bracket in Bilateral Loans Language

─ Hedged Approach: • That would apply to the fallback rate for a derivative transaction referencing the ISDA

Definitions

42

What’s market for loans?

Eversheds Sutherland

Eversheds Sutherland market study What’s market for loans?: LIBOR fallback language

─ ARRC recommendations

• May 2019 – September 2019: Out of 204 publicly available credit agreements/amendments reviewed, 47 included the ARRC Recommendation for Syndicated Business Loans

─ Pre-ARRC approach

• May 2019 – September 2019: Out of 204 publicly available credit agreements/amendments reviewed, 142 included the Pre-ARRC approach or a variation thereof

─ Other LIBOR fallback language

• May 2019 – September 2019: Out of 204 publicly available credit agreements/amendments reviewed, 14 included some other form of LIBOR fallback language

─ Only 1 Credit Agreement did not contain LIBOR fallback language

44


Eversheds Sutherland monthly LIBOR trackerWhat’s market for loans?: LIBOR fallback language

45

0

10

20

30

40

50

60

May June July August September

4 719

8 9

30

388 26

403

1

6

4

Monthly LIBOR TrackerMay 2019 - September 2019

ARRC Pre-ARRC Other


Examples of negotiationsWhat’s market for loans?: LIBOR fallback language

─ Pro-Borrower Negotiations re Benchmark Replacement Conforming Changes • Insertion of language limiting Agent’s discretion to make Benchmark Replacement Conforming

Changes “with the written consent of the Borrower (such consent not to be unreasonably withheld, conditioned or delayed)”

─ Pro-Agent Negotiations re Benchmark Unavailability Period• Insertion granting Agent control over LIBOR Borrowing – “Upon the Borrower’s receipt of notice of

the commencement of a Benchmark Unavailability Period, (A) any Conversion or Continuation Notice that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Borrowing at the LIBOR Rate Option shall be ineffective and (ii) if any Loan Request requests a Borrowing at the LIBOR Rate Option, such Borrowing shall be made as a Borrowing at the Base Rate Option”

─ Pro-Agent and Pro-Borrower Negotiations re Lenders Consent Right• Insertion limiting Lenders’ consent right to spread adjustment “provided, that, with respect to any

proposed amendment containing any SOFR-Based Rate, the Lenders shall be entitled to object only to the Benchmark Replacement Adjustment contained therein”

• Insertion requiring Lenders to specify objection “(which written notice will specify the provisions of such amendment to which such Lender objects)”

46


Eversheds Sutherland market study

What’s market for loans?: Agent’s LIBOR Disclaimer of Responsibility provision

─ The Agent’s LIBOR Disclaimer of Responsibility provision is language added at the end of the Definition section in credit agreements, whereby the Agent expressly denies responsibility with respect to the submission, administration and all other matters related to LIBOR and any LIBOR Successor Rate

─ There is a long form and a short form of the provision. The short form derives from the long form

─ Eversheds Sutherland market study• April 1, 2019 – September 30, 2019: Out of 244 publicly available

Credit Agreements, the Agent’s LIBOR Disclaimer of Responsibility provision was present in 52 (21.3%): 30 Short Form and 20 Long Form

47


Provisions

What’s market for loans?: Agent’s LIBOR Disclaimer of Responsibility provision

─ Short form• The Administrative Agent does not warrant, nor accept responsibility, nor shall the Administrative

Agent have any liability with respect to the administration, submission or any other matter related to the rates in the definition of “[LIBOR][Eurodollar Rate][Screen Rate]” or with respect to any comparable or successor rate thereto

─ Long form• The interest rate on LIBOR Loans is determined by reference to LIBOR, which is derived from the London

interbank offered rate. The London interbank offered rate is intended to represent the rate at which contributing banks may obtain short-term borrowings from each other in the London interbank market. In July 2017, the UK Financial Conduct Authority announced that, after the end of 2021, it would no longer persuade or compel contributing banks to make rate submissions to the ICE Benchmark Administration (together with any successor to the ICE Benchmark Administrator, the “IBA”) for purposes of the IBA setting the London interbank offered rate. As a result, it is possible that commencing in 2022, the London interbank offered rate may no longer be available or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on LIBOR Loans. In light of this eventuality, public and private sector industry initiatives are currently underway to identify new or alternative reference rates to be used in place of the London interbank offered rate. In the event that the London interbank offered rate is no longer available or in certain other circumstances as set forth in Section [2.15(b)], Section [2.15(b)] provides a mechanism for determining an alternative rate of interest. The Administrative Agent will notify the Borrower, pursuant to Section [2.15], in advance of any change to the reference rate upon which the interest rate on LIBOR Loans is based. However, the Administrative Agent does not warrant or accept any responsibility for, and shall not have any liability with respect to, the administration, submission or any other matter related to the London interbank offered rate [or other rates in the definition of [Eurodollar Rate][Screen Rate]] or with respect to any alternative or successor rate thereto, or replacement rate thereof, including without limitation, whether the composition or characteristics of any such alternative, successor or replacement reference rate, as it may or may not be adjusted pursuant to Section [2.15(b)], will be similar to, or produce the same value or economic equivalence of, LIBOR or have the same volume or liquidity as did the London interbank offered rate prior to its discontinuance or unavailability

48

What needs to be done?

What needs to be done?

─ Review all contracts and disclosures that refer to LIBOR• In what contracts do you use or make reference to LIBOR? (Debt, hedges and investments are obvious but do not forget

equity, general contracts)• In what currencies do you use LIBOR (or one of the other troubled reference rates)?• What fallback language do you have, if any?• Are there mandatory prepayment provisions?• What consent, approval and/or notification is required to amend, call or tender?• What are the procedures to amend, call or tender?

─ Assess termination risk and likely impact

─ Assess litigation risk

─ Review impact on hedges

─ Review accounting treatment and impact

─ Review tax treatment and impact

─ Determine reporting requirements • Review public disclosures of LIBOR transition risk exposure• Consider proactive communication to educate your investors

─ Review regulatory requirements regarding use of intended rates and disclosures regarding rates

─ Evaluate anti-trust implications

─ Determine back-office changes

─ Educate your team on the need (i) for robust, preferably consistent fallback language, and (ii) to use LIBOR with caution

50

Countdown to January 1, 2022What needs to be done?

774 days until January 1, 2022

51


Questions?

52

Cynthia KrusPartner, Washington, DCt: +1 202.383.0218e: [email protected]

Vlad BulkinPartner, Washington, DCt: +1 202.383.0815e: [email protected]

Vlad Bulkin represents issuers and underwriters in public and private securities offerings, including initial public offerings, shelf offerings, at-the-market offerings, registered direct offerings, high-yield bond offerings, convertible debt offerings, Rule 144A offerings, and rights offerings. Vlad also regularly advises public companies, including business development companies and registered closed-end funds, on corporate governance matters and compliance with the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Investment Advisers Act of 1940 as well as NYSE, NASDAQ and FINRA regulations.

Cynthia Krus counsels companies and alternative investment funds in their quest to grow their businesses, especially in the crucial area of raising capital. She also works with management teams and boards of directors to develop strategic plans and timing for critical decisions in all aspects of their businesses, including mergers and acquisitions; proxy contests; going-private transactions; reorganizations; debt, equity and rights offerings; and other securities and capital markets transactions. She is recognized as a leading adviser to business development companies (BDCs) and small business investment companies (SBICs).

Cynthia currently serves as the Executive Partner of Eversheds Sutherland (US), and is on the Global Executive Management Team and the Global Board for Eversheds Sutherland Ltd. In addition to being responsible for the day-to-day management of Eversheds Sutherland (US), Cynthia focuses on the integration efforts of the firm’s practice groups with the global legal practice, and the firms’ operational integration.

With more than 20 years working in this specialized area, Cynthia brings deep, hands-on experience to the complex issues—both legal and strategic—faced by companies. She counsels public companies in a broad range of corporate and securities matters, such as corporate governance, crisis management, whistleblower response, disclosure, executive compensation and shareholder matters.

Cynthia is the author of the Corporate Secretary’s Answer Book, which is updated annually, and frequently speaks at industry conferences on regulatory, corporate governance, and capital raising issues.

Christina RisslerPartner, Washington, DCt: +1 404.853.8175e: [email protected]

Christina Rissler has more than 18 years of experience representing lenders, borrowers and other market participants in secured and unsecured commercial lending and structured finance.

Christina advises on senior, second lien and subordinated financings; workouts and restructurings; single-currency and multicurrency, domestic and cross-border financings; lines of credit; letter of credit transactions; securitization; and loan syndications and participations. She also regularly advises clients regarding the proposed cessation of the London Interbank Offering Rate (“LIBOR”) and the transition of existing LIBOR-based contracts to new reference rates such as the Secured Overnight Financing Rate (“SOFR”). Christina has given a number of presentations on reference rate replacement and other topics of interest within the commercial finance space.

After graduating first in her class from Notre Dame Law School, Christina served as a law clerk for the Honorable Paul J. Kelly, Jr. of the US Court of Appeals for the Tenth Circuit, and is admitted to practice before that court. She is also admitted to practice law in Georgia, New York and Colorado. In April 2018, Christina was admitted to the American College of Commercial Finance Lawyers as a Fellow. She is a former Chair of the Loan Documentation Subcommittee of the Commercial Finance Committee of the ABA’s Business Law Section.

James CainPartner, Atlantat: +1 404.853.8041e: [email protected]

With more than three decades of experience, Jamie Cain has guided insurers, banks, securities and commodities firms, and funds through significant transactions that transform their businesses, including public and private securities offerings and mergers and acquisitions. He regularly works with U.S. and foreign companies to interpret and comply with the myriad of securities, commodities, insurance and banking laws that apply to these transactions.

A frequent speaker at industry conferences, Jamie is recognized for his knowledge of the Dodd-Frank Act and the regulation and use of derivatives including those instruments used for interest rate, foreign exchange, commodity, credit default and equity transactions and related collateral arrangements. He represents a wide range of global clients, typically on the buy side, including major public companies, financial institutions, public and private funds, government sponsored enterprises and foreign governments. He advises these clients on documentation of those transactions and on internal and regulatory compliance, investigations, enforcement actions and other disputes, including those arising from closeout and valuation in the context of counterparty insolvency proceedings.

Jamie also advises insurers, banks and broker-dealers in connection with cross-industry acquisitions and in the distribution of their respective products both domestically and internationally.

Eversheds Sutherland at a glance

─ 39th global law firm by revenue─ 5,000+ people across Eversheds Sutherland─ 34 countries with Eversheds Sutherland offices─ 69 offices across Africa, Asia, Europe, the Middle East and

the U.S.─ 8 offices in the U.S.─ 17 countries covered by our Eversheds Sutherland Latin

America Alliance─ 35+ offices in our Eversheds Sutherland Africa Law

Institute network ─ 40+ countries covered by our Eversheds Sutherland Asia

Pacific Alliance

55


Eversheds Sutherland global

56

US

AtlantaAustinChicagoHoustonNew YorkSacramentoSan DiegoWashington DC

Africa

South AfricaDurbanJohannesburgTunisiaTunis

MauritiusPort Louis

Middle East

IraqBaghdadErbilJordanAmmanQatarDoha

Saudi ArabiaRiyadhUnited Arab EmiratesAbu DhabiDubai

Asia Pacific

SingaporeSingaporeBruneiBrunei Darussalam

ChinaBeijingHong KongShanghai

Europe

AustriaViennaBelgiumBrusselCzech RepublicPragueEstoniaTallinnFinlandHämeenlinnaHelsinkiJyväskyläTampereTurku

FranceParisGermanyBerlinDüsseldorfHamburgMunichHungaryBudapestIrelandDublinItalyMilanRome

LatviaRigaLithuaniaVilniusLuxembourgLuxembourg CityNetherlandsAmsterdamRotterdamPolandWarsawRomaniaBucharest

RussiaMoscowSt PetersburgSlovakiaBratislavaSpainMadridSwedenStockholmSwitzerlandBerneGenevaZurich

United KingdomBelfastBirminghamCambridgeCardiffEdinburghIpswichLeedsLondonManchesterNewcastleNottingham


Additional resources

Legal Alert – Regulatory Guidance on the Transition Away from LIBOR

─ The full Legal Alert can be found here: https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/222795/Legal-Alert-Regulatory-guidance-on-the-transition-away-from-LIBOR

Legal Alert – December 31, 2021, Changes to the London Interbank Offered Rate (LIBOR) Are Coming—Will You Be Ready?

─ The full Legal Alert can be found here: https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/213747/Legal-Alert-December-31-2021-changes-to-the-London-Interbank-Offered-Rate-LIBOR-are-comingwill-you-be-ready

Legal Alert – ISDA publishes benchmarks supplement

— The full Legal Alert can be found here: https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/214790/Legal-Alert-ISDA-publishes-benchmarks-supplement

57

https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/222795/Legal-Alert-Regulatory-guidance-on-the-transition-away-from-LIBOR

https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/213747/Legal-Alert-December-31-2021-changes-to-the-London-Interbank-Offered-Rate-LIBOR-are-comingwill-you-be-ready

https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/214790/Legal-Alert-ISDA-publishes-benchmarks-supplement

LIBOR considerations for lenders and borrowers, …...2019/11/19 · FCA: U.K. Financial Conduct...

Documents

Transcript of LIBOR considerations for lenders and borrowers, …...2019/11/19 · FCA: U.K. Financial Conduct...