LSTA Publishes New Forms of Amendments to SOFR – Financial Services

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The LIBOR transition process continues. New deals are (mostly) done without using LIBOR anymore, and many legacy deals are understandably in transition when refinanced or renewed this year. However, a significant portion of the legacy loan market will require active transition on or before LIBOR termination on or before June 30, 2023. To help members think through the process, the LSTA has produced and distributed a series of change forms (LSTA membership required to access the forms) which can be used by market participants as part of the LIBOR transition.

There are three basic methods for moving from an old LIBOR loan to a benchmark replacement rate. The first can be called a “consensus amendment”. This is a standard, old-fashioned type of amendment – the parties to a transaction come together and all (usually this would require a 100% vote of lenders) agree to amend an agreement to replace LIBOR with a rate of replacement. The second is to operationalize the ARRC-style “amendment approach”. This would allow certain parties (usually the agent and the borrower) to select a new rate and, pursuant to an amendment, incorporate the new rate and the mechanisms necessary to implement it with a consent threshold usually below a consensual amendment (for example, as long as 50% of lenders do not object after a certain period of time). The third is to use the “hard-wired approach”. This method provides for a transition to a pre-agreed rate on a certain date, as long as that rate is available and administratively feasible.

However, it is important to remember that even under the ARRC modification approach or the hardwired approach, fallback provisions are only part of what is needed to ensure the transition. complete loan documentation towards alternate rates. Although the standard fallback language can tell you how fast to switch and when, it almost never provides the actual transition mechanisms. For example, fallback language may indicate to parties that upon the termination of LIBOR, the interest rate on a loan will change to forward SOFR plus an ARRC-recommended spread. However, as a further step, the Loan Agreement will need to be amended to insert the definitions and mechanics of the SOFR Adjusted Term Rate (for example, inserting definition of “Term-adjusted SOFR”, removing references to LIBOR, changing how “interest period” is used, changing language for Eurocurrency liabilities, adding day definition business of US government securities, etc.). These technical, administrative, or operational changes are referred to, in standard ARRC and LSTA drafting, as “benchmark replacement compliant changes” and can often be implemented unilaterally by officers.

There are two fundamental ways to accomplish the mechanical part of the LIBOR transition that is developing in the market, with variations on the spectrum in between. One is a “standard” amendment. This is what it looks like – it’s a normal-looking amendment that we’re all used to. Consider this “delete section 2.05(a) and insert the following section 2.05(a) in its place.” It is tailored to a loan agreement and describes (accurately) the changes needed to implement a transition. This requires careful tailoring and drafting unique to each loan agreement.

Another option is a bit of a novelty that, to our knowledge, was developed purely for LIBOR transition purposes. This is what we have dubbed a “golden amendment”. A golden amendment is designed to be a blunt tool that could modify documents en masse. Think of it as “if you have anything in your agreement that is a definition of LIBOR or provisions relating to LIBOR, they are deemed amended to refer to adjusted term SOFR instead”. To be useful as a tool, it must be very generic and capture, as far as possible, all the variations or provisions that could be observed in the market for syndicated credit agreements.

There are pros and cons to using either approach (standard or golden amendments), or gradations between the two, and some lenders use each in different circumstances. Cadwalader is happy to discuss options and considerations with all market participants (mandatory business development quota satisfied!).

Below we will explain how the forms provided by the LSTA can be used in certain circumstances.

SOFR Term/Daily Simple SOFR Consensus Amendment: This is a form that would allow the parties to implement a conforming and underlined credit agreement (which would be attached as an attachment) to pass the reference rate. This is a standard amendment, that’s to say, it does not use fallback provisions. Many agents will have their own change form that can be used for this purpose; the LSTA has provided this form as an example. It will take a detailed modification exercise to have a correct compliant credit agreement, and is particularly useful if other modifications are being made at the same time.

Benchmark Replacement Amendment: This form is to be used as part of fallbacks to the ARRC type modification approach. The facade of this endorsement selects the replacement rate and replacement date, subject to the necessary consents. An attachment would be attached to include the “Operating Terms” that implement the details of the transition.

Changes consistent with baseline replacement: This is the coverage change used to implement the changes in line with the baseline override. Amendments consistent with the replacement of the benchmark are usually implemented unilaterally by the agent and therefore neither the borrower nor any lender signs. A document would also be attached to this form to include the “operating terms” that implement the details of the transition.

Operating terms/Part A: This is where the magic really happens. These are the operating conditions for a “golden amendment” modification of a syndicated loan agreement. This exhibition may be attached to a reference replacement amendment booklet or modifications in accordance with the reference replacement. These provisions, among others:

  • insert the applicable definitions for the new reference tariff structure

  • remove all unused LIBOR-related definitions

  • set a date when LIBOR will no longer be available

  • change the provisions of the documents to refer to adjusted term SOFR instead of LIBOR

  • remove references to London business day and London interbank market

  • change the notice periods so that they become a standard [three (3)] US Government Securities Business Days

  • update the wording of the liabilities in eurocurrencies

Note that these Operational Terms/Appendix A make it clear that you are not entering into existing LIBOR tranches for transition purposes, consistent with the wording of the ARRC and LSTA and the expectations of most market participants. In other words, if a tranche of 3-month LIBOR were fixed on June 1, 2023, this loan would continue to bear interest at 3-month LIBOR until September 1, 2023 (even if LIBOR ceases on June 30, 2023).

The LSTA prepares Daily Simple SOFR versions of these documents, as appropriate, for further distribution.

Cadwalader wrote guidance for the LSTA in the challenging and rewarding process of developing these documents, which worked their way through various working groups, the LSTA Primary Markets Committee and ultimately wide distribution. We are always happy to discuss this, or any other subject, with our customers and friends.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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