In April 2021, Alabama followed New York’s lead and passed the LIBOR Discontinuance and Replacement Act of 2021, a bill aimed at addressing LIBOR cessation with respect to USD LIBOR contracts governed by Alabama law that include either insufficient, or no, LIBOR fallbacks.
Like New York’s LIBOR bill (discussed in a prior post), Alabama’s LIBOR bill was officially triggered by a “LIBOR discontinuance event” on March 5, 2021, when LIBOR’s administrator and LIBOR’s regulator each announced that: (i) 1-week and 2-month USD LIBOR would cease to be published after publication on December 31, 2021; and (ii) overnight, 1-, 3-, 6- and 12-month USD LIBOR would cease to be published after publication on June 30, 2023. As a result, the “recommended benchmark replacement” – i.e., SOFR (the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York) – will, by operation law following those dates, be the benchmark replacement rate for any Alabama-law governed LIBOR-linked contracts that include no fallback provisions or that include a fallback benchmark rate that is in any way based on a LIBOR value. In addition, any fallbacks in LIBOR contracts that require a contract party to “poll” other entities for a replacement rate will be deemed null and void and without any force or effect.
Perhaps most important, for legacy contracts, Alabama’s bill, like New York’s LIBOR bill, also provides a safe-harbor from liability to a contract party that selects SOFR as a replacement benchmark index under a LIBOR fallback that provides such party with the discretion to choose an alternative rate. SOFR will be deemed a “commercially reasonable” replacement for, and a “commercially substantial” equivalent to, LIBOR in that regard and will be deemed to be a replacement that is “based on a methodology” that is comparable to LIBOR.
Like New York’s LIBOR bill, Alabama’s LIBOR bill does not apply to USD LIBOR contracts that already include fallback provisions recommended by the ARRC (which, in any case, already fall back to SOFR) or that do not use USD LIBOR as a benchmark rate.
It is possible that other states may take up New York and Alabama’s lead and pass similar LIBOR legislation. However, federal legislation is also under consideration, which would pre-empt such laws and apply nationwide. No such legislation has yet been passed, but a draft bill is advancing in Congress. This blog will continue to provide updates on Congress’s progress in that regard, as well as any other states that elect to move forward with LIBOR bills of their own.