On May 16, 2022, Refinitiv Benchmark Services Limited (RBSL), the benchmark administrator of the Canadian Dollar Offered Rate (CDOR), announced that the calculation and publication of all tenors of CDOR will permanently cease after June 28, 2024 (the CDOR Cessation Date). This announcement followed a period of significant public consultation by the Canadian Alternative Reference Rate working group (the CARR), which culminated in the publication of the CARR White Paper on December 16, 2021. The White Paper included several recommendations, including (i) that RBSL permanently discontinue the calculation and publication of CDOR and (ii) that market participants adopt the Canadian Overnight Repo Rate (CORRA) as a replacement rate for CDOR. As discussed below, this transition will also affect the bankers’ acceptance lending model typically employed in Canadian dollar credit facilities.

To encourage market participants to transition their credit facility documentation to CORRA, the CARR published recommended fallback language (the Recommended Language) for use in new and existing loan agreements in August 2022. Using the Recommended Language will ensure that credit agreements contain a robust benchmark rate following the future cessation of the publication of CDOR by RBSL by providing an automatic, hardwired transition to CORRA.

Recommended or required language?

The Recommended Language terms are only recommendations and may be voluntarily included in loan documentation that currently references CDOR. Parties may alter the terms to accommodate their needs and preferences, and market participants are not bound to these recommendations. There may also be changes made to the Recommended Language as the market evolves, and it is important for interested parties to monitor any updates should the language be adopted. Nevertheless, the cessation of the London Interbank Offered Rate (LIBOR) demonstrated the various legal, economic, and practical issues that can arise when fallback language is ambiguous or nonexistent. The adoption of the Recommended Language is one way to ensure that a credit agreement includes strong fallback language, saving time, money, and legal resources in the future.

The CORRA Replacement Language

The Recommended Language includes proposed hardwired fallback language, which can be inserted into credit agreements and modified as the context requires. The following is a high-level overview of some of the important features of the Recommended Language. Capitalized terms described below, which are not otherwise defined herein, are defined in the Recommended Language.

Takeaways

The CARR has drafted thorough, unambiguous language to help parties prepare for the cessation of CDOR. Although optional, it is strongly recommended by the CARR that parties adopt the Recommended Language and ensure they protect themselves from the challenges that may arise from inadequate fallback language later on. It is also important to note that these are general recommendations made by the CARR and that borrowers and lenders should determine and incorporate their own language based on their specific circumstances and needs.