Benchmark Interest Rate Replacement Clause
(Amendment) (Credit Agreement)

Summary

This benchmark replacement clause is used in credit agreements to provide for a replacement interest rate in the event that the current benchmark rate becomes unavailable or ceases. This benchmark replacement clause takes an amendment approach to adopting the replacement rate. This clause includes practical guidance, drafting notes, and alternate and optional clauses. Interest rate replacement clauses became very important in the transition from the London Inter-Bank Offered Rate (LIBOR) to replacement rates, primarily the Term Secured Overnight Financing Rate (Term SOFR), as LIBOR was discontinued in 2023. Now that Term SOFR has become the prevalent benchmark interest rate, the benchmark replacement provisions have adjusted to cover the contingency of Term SOFR or the then-current benchmark becoming unavailable. This clause specifies what happens once the administrative agent is no longer able to ascertain the benchmark interest rate. This clause follows the so-called "amendment approach." The amendment approach requires a subsequent amendment to the credit agreement to effectuate the interest rate change, leaving open interest rate determinations to be made by the administrative agent and borrower. So long as such amendment addresses only benchmark replacement as described in the credit agreement, the amendment typically becomes effective with the "negative consent" of the required lenders. Alternatively, a "hardwired approach" may be used which provides priority waterfalls, ranking the top choices of replacement benchmark interest rates, the tenor (interest periods) of such replacements, and the spread adjustment for the replacements, if applicable. The hardwired approach does not require an amendment to the credit agreement. For a full listing of key content covering amendments, consents, and other modifications for loan documents, see Amendments, Consents, and Waivers Resource Kit. For a search in Market Standards of recent publicly filed credit agreements with benchmark replacement provisions using the amendment approach, click here. For an example of benchmark replacement clauses using the hardwired approach, see Benchmark Interest Rate Replacement Clause (Hardwired) (Credit Agreement) and Benchmark Interest Rate Replacement Clause (Hardwired) (Bilateral Credit Agreement). For further guidance on interest rate provisions in credit agreements, see Interest Rate Provisions in Credit Agreements (SOFR) and Amendments and Lender Voting Right Issues in Credit Agreements. For a template of interest rate and fee clauses, see Interest Rates and Fees Clauses (Credit Agreement).