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

Summary

This benchmark replacement clause is used in a credit agreement to provide for a replacement interest rate if the current benchmark rate becomes unavailable or ceases. This benchmark replacement clause takes a hardwired approach (does not require an amendment to the credit agreement). 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 "hardwired approach." Hardwired approach provisions include 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, rather the interest rate is automatically replaced based on the provisions. Alternatively, an "amendment approach" may be used, which requires a subsequent amendment to the credit agreement to effectuate the interest rate change. Unlike the hardwired approach, the amendment approach leaves open the replacement interest rate determinations to be negotiated between the administrative agent and borrower at the time of replacement. 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 hardwired approach, click here. For an example of a benchmark replacement clause using the amendment approach, see Benchmark Interest Rate Replacement Clause (Amendment) (Credit Agreement). For an example of a benchmark replacement clause for a bilateral credit agreement using the hardwired approach, see 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).