The ARRC wording, released last night, follows its consultation, and its July 2018 proposed methodology seems largely to have been accepted. The aim is to avoid the FRN switching to a fixed rate loan by providing a hierarchy (“waterfall”) of pre-determined (“hard-wired”) fallbacks:
- Term SOFR + Adjustment
- Compounded SOFR + Adjustment
- Relevant Governmental Body Selected Rate + Adjustment
- ISDA Fallback Rate + Adjustment
- Issuer or its Designee Selected Rate + Adjustment
Like the LMA and unlike (so far) ISDA, it includes a pre-cessation trigger – a public statement by the UK’s FCA that LIBOR is “no longer representative”. The advantage of the hardwired approach (see above) is certainty: when LIBOR goes, there is nothing to discuss. The LMA’s approach at the moment is that the parties would agree on the replacement, and that is an option the ARRC recognises. The problem it notes with that is that if you have to amend thousands of deals once LIBOR is almost gone, then you will have thousands of simultaneous negotiations, and unless the borrower and the lenders have equal bargaining power at the time, this could become awkward. Possibly the headline-grabbing issue is that the first hardwired option is Term SOFR, which does not (yet) exist (although the ARRC is working on it). The ARRC is encouraging new USD LIBOR loan agreements to start using the fallback language now. We should expect something similar from the LMA soon.