Fannie Mae and Freddie Mac recently provided additional details of the necessary changes to outstanding adjustable-rate mortgage loans that currently are linked to LIBOR indices. As expected, these changes largely mirror the changes mandated in the recently enacted Adjustable Interest Rate (LIBOR) Act (“LIBOR Act”), as well as current practice for new Fannie Mae and
Syndicated and Bilateral Loans
LIBOR Lapse Looms Large
Attention Loan Market Participants: There are fewer than 145 days until US dollar LIBOR no longer is published on a representative basis. While some segments of the market are well advanced in transitioning from the London InterBank Offered Rate to the Secured Overnight Financing Rate, the lending market generally is behind. Given the substantial volume…
LIBOR Phase Out – Tax Implications in the Context of Related-Party Loans
As market participants evaluate their loan portfolios and implement strategies to transition away from the London Interbank Offered Rate (“LIBOR”), they must address not only third-party loans, but related-party loans as well.…
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HKMA Circular on Term SOFR, new USD LIBOR-linked contracts after 2021, and stepping up surveillance of AI readiness
On 19 August 2021, the Hong Kong Monetary Authority (“HKMA”) issued Circular B1/15C to all authorised institutions (“AIs”) with the following updates on recent developments on the reform of interest rate benchmarks.
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A Closer Look at the Adjustable Interest Rate (LIBOR) Act of 2021
The version of the proposed federal Adjustable Interest Rate (LIBOR) Act of 2021 that was introduced in the House of Representative in 2020 mirrored, with a handful of notable exceptions, both the substance and the text of the analogous New York State legislation that became law on 6 April 2021 (the New York statute is included as a new article 18-C of the General Obligations Law). However, the text of the proposed federal statute that the House Committee on Financial Services ordered reported to full House on 28 July of this year differs markedly from the New York statute.
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Voting With or Dragging Their Feet (Depending on Your Viewpoint): US Loan Markets Continue to Show Interest in Credit-Sensitive Alternatives to SOFR
Despite recent regulatory “encouragement” to adopt SOFR as “preferred” by the Alternative Reference Rates Committee (ARRC), we continue to observe credit agreements in the US loan markets that use a credit-sensitive alternative rate (CSR) to SOFR.
In fact, a recent check of public filings showed eight reported credit agreements that used a CSR, specifically the…
Almost Time for Term SOFR
On 21 July 2021, the U.S. Alternative Reference Rates Committee (“ARRC”) announced the publication of conventions and use cases for employing Term SOFR, as produced by CME Group, in transitioning loan products away from LIBOR. Although the ARRC has not yet recommended the use of Term SOFR, it published these new resources in anticipation of announcing shortly a formal recommendation for the use of Term SOFR “across financial markets.”
While generally helpful to support a smooth transition, the ARRC noted that Term SOFR will be especially helpful in the business loans market, particularly multi-lender facilities, middle market loans, and trade finance facilities, as well as in limited cases of hedges and securitizations tied to term rates.…
A Brief Reprieve on LIBOR Cessation
On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of U.S. Dollar LIBOR (“USD LIBOR”) and other IBORs, lowered the pressure with respect to the upcoming cessation of USD LIBOR. IBA announced that, following a consultation in December and January, (i) it intends to cease publication of 1-week and 2-month USD LIBOR at the…
Expanding the Documentary Toolkit for Transition from LIBOR: The LMA’s Latest Volley of Documents for the Loan Markets
On 23 November 2020, the LMA published various documents with the aim of assisting market participants looking to include active LIBOR transition mechanisms in their loan documentation. These documents are a mix of new and revised versions of existing drafts, comprising:
- a revised version of the exposure draft multicurrency term and revolving facilities agreement incorporating rate switch provisions (lookback without observation shift);
- a new exposure draft multicurrency term and revolving facilities agreement incorporating rate switch provisions (lookback with observation shift);
- a revised commentary document relating to both rate switch facilities agreements referred to above;
- a new term sheet for use in conjunction with the two exposure draft rate switch facilities agreements; and
- new supplemental wording intended as an option for parties using the LMA’s Revised Replacement of Screen Rate wording published in August 2020, which includes a placeholder for pre-agreed terms in a process of renegotiation. This supplementary wording is designed as a starting point for parties looking to populate this placeholder by specifying pre-agreed terms in relation to the RFR.
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Will Amending a Facility Agreement to Move from an IBOR to an RFR Require Guarantee and Security Confirmations?
When amending a material term of a loan transaction that includes guarantees and/or security governed by the laws of several jurisdictions, it is often prudent for creditors to obtain guarantee and/or security confirmations to ensure that the amendment does not adversely affect their rights to claim under the guarantee or enforce the security. As we head toward 2021, it is well documented that loan agreements with final maturities beyond the end of 2021 that are priced by reference to an IBOR benchmark will need to be amended unless they contain fallback provisions that stipulate a replacement rate for, or procedure for replacing, the relevant IBOR. So, will changing the benchmark rate necessitate guarantee and/or security confirmations, or will this additional hurdle be something that can be avoided?
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