ARRC Releases Recommendations for Fallback Language for LIBOR Securitizations
June 19, 2019
On May 31, 2019, the Alternative Reference Rates Committee (“ARRC”) released recommended language for the replacement of LIBOR with an alternative benchmark rate in new securitizations. The recommended language for new securitizations follows similar language released on April 25, 2019 for floating rate notes, and is in addition to the fallback language provided by ARRC for bilateral business loans (in a release also dated May 31, 2019) and syndicated loans (in a release dated April 25, 2019).
In keeping with the recommended language for floating rate notes, the language for securitizations provides for a “hardwired” approach in which no document amendment would be required to implement the replacement benchmark rate. After a replacement trigger event (e.g., a public statement by the administrator of the LIBOR benchmark rate that it has ceased or will cease to provide a LIBOR benchmark rate), if rates of any tenor of LIBOR are still available, a rate would be interpolated using those available rates. However, if no such rates are available, a replacement benchmark rate would be selected by following a specified priority of available unadjusted benchmark rates and spread adjustments (which are intended to allow for rates to be comparable to LIBOR). These unadjusted benchmark rates include rates derived from the Secured Overnight Financing Rate (“SOFR”) (such as a compounded SOFR or a forward-looking term rate based on SOFR) or based on rates applicable to derivatives transactions governed by International Swaps and Derivatives Association (“ISDA”) documents. Spread adjustments in the recommended fallback language would include those selected, endorsed or recommended by the Federal Reserve Board or the Federal Reserve Bank of New York or used in ISDA derivatives transactions.
Notably, the recommended language for securitizations introduces the concept of a Designated Transaction Representative. In the recommended fallback language for floating rate notes, the issuer (or its designee) would determine whether a replacement trigger event has occurred and ultimately would determine the replacement benchmark rate and any conforming document changes. In securitizations, the Designated Transaction Representative would perform this role and would be given discretion, within the parameters generally described in the above paragraph, to determine and implement the replacement benchmark rate. ARRC suggests in a parenthetical note that such a role would be fulfilled by an affiliate of the issuer or other agent, but does not provide further guidance on the appropriate party to undertake the role. Although service providers may be asked to act as the Designated Transaction Representative, it is important to understand that, despite the detailed process provided by ARRC, the role may require certain discretionary functions in determining and implementing a replacement benchmark rate. Service providers should consider all legal and operational aspects of the Designated Transaction Representative role before agreeing to perform it.
If you would like further information about this or any other matter, please feel free to contact any member of the Global Bank and Institutional Finance & Restructuring Group.