Borrowers and administrative agents in the syndicated loan markets continue to negotiate and fine-tune various fallback provisions related to LIBOR transition. Although pricing had traditionally been considered a “sacred right” requiring all lender approval, one of the most ubiquitous aspects to these LIBOR-transition-related fallback provisions is limiting or removing syndicate members’ consent rights to the replacement rate in the name of easing the logistics of such a massive overhaul. In fact, both the “Amendment Approach” and the “Hardwired Approach” recommended by the Alternative Reference Rates Committee (“ARRC”) have moved away from an all-lender standard. Although moving to a lesser standard should ease the pain of transition, prudent syndicate members will review these fallbacks with caution. Below is a list of LIBOR-transition-related issues that syndicate members should consider before making a commitment to lend.
1. Negative Consent Timing Requirements
Many credit facilities’ LIBOR-transition fallbacks, including those based on ARRC’s recommended “Amendment Approach,” provide that any replacement rate negotiated between the administrative agent and the borrower be subject to a negative consent right of syndicate lenders. Because market transition language generally gives the administrative agent an affirmative consent right over any new rate, a borrower’s ask for a shorter negative consent timeline is often an easy give for the administrative agent over the course of the negotiation. In light of market forces, syndicate members have accepted these transaction-by-transaction negotiated timelines, and therefore no universal timing requirement has been effectively established—although a five-business day period is the most common period for negative consent. With respect to any transactions documented based on ARRC’s recommended “Hardwired Approach” (which ARRC has recommended that all banks use for new loans documented after September 30, 2020), lenders will not have even a negative consent right as long as one of the SOFR-based rates included in the rate waterfall can be determined by the administrative agent at the time of transition. The lack of global standard timing and universal consent mechanics poses a risk of inadvertent non-objection. This risk is magnified by the fact that once LIBOR transition amendments begin to be formalized, they are likely going to spread through the market quickly. Accordingly, syndicate members should track the timing requirements on a deal-by-deal basis and establish a procedure on how best to prioritize, review and respond to the onslaught of transition amendments—ideally accounting for timing considerations and consent rights, dollar amount, line of business, and their proportion of the aggregate lender commitments.
Many syndicate lenders plan to engage outside counsel to help review transition amendments in light of these tight timing requirements and the onslaught of amendments that are expected to be presented in a short period of time. Given the transition is quickly approaching, outside counsel should be retained now in order to help lenders develop a comprehensive transition plan and to provide enough time for counsel to pre-clear any expected conflict of interest.
2. Loan Systems
Given that syndicate lenders may not have a consent right (or be able to defeat a proposal via a negative consent due to the size of their commitment), lenders should start planning for rates that do not fit into their existing internal operation and computer systems. While many lenders have already started working on transitioning their systems to accommodate daily SOFR (the likely replacement rate), lenders should build flexibility into their systems to accommodate rates that do not comport with their chosen replacement—as they might get “dragged along” to a pricing model not consistent with their broader portfolio of loans.
3. Required Lender Definitions
The negative consent approach discussed above basically provides that the administrative agent and borrower will decide on a replacement rate and the other syndicate lenders will have a certain time period to object, so long as those objecting comprise “Required Lenders”. Accordingly, lenders must keep in mind that the presumption and related voting hurdle to effectuate any amendment is flipped—Required Lenders must vote to block the amendment. Most other uses of the Required Lender concept in a standard credit facility will require affirmative consent—where the Required Lenders must vote to change the status quo.
In addition to flipping the presumption, lenders should carefully review how “Required Lenders” is defined and formulated. For example, in club deals, the definition of Required Lenders is often formulated to include a “two or more lender” standard. This approach generally addresses the concern that one bank and the borrower might have a broader relationship, which would result in the single bank agreeing to favorable terms to the detriment of the rest of the syndicate (which is a bigger risk if the commitments are concentrated in a few lenders). In the context of a negative consent, however, this could actually work against a syndicate member.
This is especially true in a two-bank deal that uses a “two or more lender” approach. In this scenario, the non-agent lender will likely be “dragged along” by the administrative agent given that the administrative agent has already approved of the replacement language before the non-agent lender was given notice of the proposal. What is probably most noteworthy is that a non-agent lender that holds more than 50% of the loan itself could be dragged along. Thus, unlike under an affirmative consent approach where no change could be effectuated without such lender’s consent, a negative consent approach permits the borrower and an agent-lender (even one with a relatively small commitment) to force a pricing change on a lender holding the majority of the loan.
Mayer Brown is currently working with many syndicate lenders around the globe on developing comprehensive processes to guard against inadvertent objection. If you are interested in learning more about LIBOR transition preparedness, reach out to any member of our IBOR Transition Task Force, subscribe to our IBOR Transition Digest, and subscribe to our Eye on IBOR Transition Blog.