On April 7, 2021, the proposed New York “legislative solution” for legacy USD LIBOR contracts became Article 18-C of the New York General Obligations Law. Article 18-C is primarily aimed at USD LIBOR contracts, securities or instruments (e.g., floating rate notes (“FRNs”), loans, securitizations and mortgages) with the 2006 ISDA Definitions LIBOR fallbacks, or no fallback provisions at all, and which are governed by New York law. This article focuses on the law’s effect on USD LIBOR FRNs.
Article 18-C has no effect on USD LIBOR FRNs that have the Alternative Reference Rate Committee’s (“ARRC”) recommended fallback provisions to the secured overnight financing rate (“SOFR”), nor does it have any effect on non-USD LIBOR FRNs.
For USD LIBOR FRNs that have a discretionary replacement fallback to an industry-accepted replacement rate standard, Article 18-C confirms that the choice of SOFR to replace USD LIBOR under the terms of the FRN is a commercially reasonable substitute for USD LIBOR, a reasonable, comparable or analogous term for USD LIBOR under the terms of the FRN, a replacement that is based on a methodology similar to LIBOR and substantial performance by any person of any right or obligation under such FRN.
On March 5, 2021, ICE Benchmark Administration Limited, the LIBOR administrator, and the U.K. Financial Conduct Authority, the LIBOR regulator, announced dates for the cessation of LIBOR. Under Article 18-C, a “LIBOR discontinuance event,” as defined, occurred with respect to all USD LIBOR tenors. Consequently, once Article 18-C came into law, the polling provisions in USD LIBOR FRNs were deemed null and void and without any force or effect. This will have no practical effect on legacy USD LIBOR FRNs because the polling provisions would only be looked to once USD LIBOR ceases (December 31, 2021 for 1-week and 2-month USD LIBOR, and June 30, 2023 for all other USD LIBOR tenors) and, at that point, Article 18-C would automatically change the USD LIBOR provisions to the ARRC recommended fallback provisions to SOFR.
With the New York legislative solution now effective, similar federal legislation is advancing, which would address FRNs governing by non-New York law.