LIBOR, the leading global benchmark interest rate, will be phased-out in 2021. Seward & Kissel’s LIBOR Transition Task Force, a team of highly focused and specialized cross-disciplinary lawyers, has developed solutions and protocols to support the Firm’s clients in connection with the adoption and implementation of replacement benchmarks for LIBOR in legacy transactions.
Seward & Kissel attorneys, including those involved in the loan, securitization, derivatives, fund finance and investment management markets have been monitoring and will continue to monitor the markets for the adoption of alternative index rates. Our in-depth knowledge of various financial products and structures provides us with unique and valuable insights into the products and structures most likely to be impacted by the phase-out of LIBOR. This enables us to review the various safeguards and amendment procedures in existing transaction documents while analyzing how the discontinuance of LIBOR impacts such transactions and their related contracts. We understand how these procedures will affect our clients and their interests and the legal and operational challenges posed by moving to a new benchmark rate. With our extensive experience and knowledge of various financial products, we are able to guide our clients through every stage of the transition process as well as advise our clients with respect to operations and logistics concerns related to the implementation of a new benchmark rate.
Our team assists clients with addressing legacy transactions with no fallback LIBOR replacement provisions, recent transactions with varying fallback provisions and pre-cessation triggers, and new transactions with either hard-wired fallbacks or those seeking to implement a Secured Overnight Financing Rate (SOFR) based benchmark before LIBOR is officially phased out. Many markets have incorporated the amendment fallback approach into the majority of agreements, which provides optionality to transaction parties to decide on a replacement rate in the future when LIBOR is no longer expected to be available, and in many cases lowers the threshold of investor consent to do so (as getting 100% investor/lender consent may be problematic). However, depending on the market, we have recently seen the inclusion of the hard-wired approach substantially in the form of the language suggested by the Alternative Reference Rate Committee of the Federal Reserve incorporated into an increasing number of agreements. As 2021 nears, the optionality of the amendment approach may sacrifice the certainty of a hardwired fallback, which would provide transaction parties with clarity on what to expect from their deals mechanically, operationally and, most importantly, economically, when LIBOR is phased out. Such certainty (or uncertainty in the alternative) can have significant consequences for reporting, projections and valuation of an asset or instrument. On the other hand, the optionality of the amendment approach still allows lenders/investors to wait and see how SOFR evolves, given that there is no current “term” market for SOFR. In addition, given that SOFR based benchmarks will likely require a spread adjustment to make them more comparable to LIBOR, certain market participants may potentially wait for additional market uniformity.
We understand the features and nuances of the LIBOR fallback options and the proposed SOFR-based replacement benchmarks and effectively advise clients as to their consequences and implications.
Our attorneys are active members of leading industry and market groups and organizations on the forefront of the LIBOR transition process, including the Loan Syndications & Trading Association, the International Swaps and Derivatives Association, the Structured Finance Association and the Loan Market Association. Seward & Kissel attorneys participate in working groups and committees within these organizations that have been tasked with preparing and adopting recommendations and protocols for the marketplace transition to a replacement benchmark. Our team also includes attorneys specializing in regulatory and compliance matters with considerable experience engaging with regulators and navigating the regulatory landscape. Composed of attorneys from our Corporate Finance, Derivatives and Trading, Global Banking & Institutional Finance, Investment Management, Maritime & Transportation Finance, Real Estate and Structured Finance and Asset Securitization practice groups, the team is advising our clients with respect to navigating the difficult issues presented by the phase-out of LIBOR.