LIBOR Replacement Clause
(Amendment)

Summary

This LIBOR replacement clause (amendment) is used in credit agreements to outline the requirements for the adoption of a substitute benchmark interest rate upon the cessation of LIBOR. This template includes practical guidance, drafting notes, and alternate clauses. As of the end of 2021, the U.K.'s Financial Conduct Authority, the regulator overseeing the London Inter-Bank Offered Rate (LIBOR), no longer required banks to provide LIBOR estimates. Relatedly, the Ice Benchmark Association (IBA) ceased one-week and two-month USD LIBOR on December 31, 2021, with all remaining tenors of USD LIBOR to be terminated in June 2023, at which point LIBOR will cease to be the predominant interest rate benchmark. This means that LIBOR will not be a viable benchmark for loan transactions at that time. This LIBOR replacement clause (amendment) can be used to allow for a switch to an alternate interest rate (the front-runner for that distinction being the Secured Overnight Financing Rate (SOFR)). This clause specifies what happens once the agent is no longer able to ascertain LIBOR, taking the so-called "amendment approach." This relies on determinations made by the administrative agent and borrower as LIBOR nears its presumed end. The other approach (hardwired), meanwhile, eliminates such discretion by falling back on prescribed benchmark rates (see LIBOR Replacement Clause (Hardwired)). The amendment approach requires a subsequent amendment to the credit agreement, while the hardwired approach does not. So long as such amendment addresses only those items described in the credit agreement, it becomes effective with the "negative consent" of required lenders. The amendment approach now faces serious shortcomings in that the parties, if they agree to this language, will then soon need to undertake the processes described in this clause for the agent and borrower to identify and deploy a successor to LIBOR prior to its June 2023 cessation. Another potential, though remote, pitfall of drafting the amendment approach to only address LIBOR cessation is that the successor rate to LIBOR could also face a fate wherein it is no longer feasible, representative, acceptable or otherwise available to be used. If taking this amendment approach to LIBOR transition, it would be efficient to also incorporate any then-current benchmark into your clauses to allow for future amendment in accordance with this clause. An "amendment approach" to cessation of future benchmarks is actually incorporated into clause (b) of the "hardwired" approach; see LIBOR Replacement Clause (Hardwired). Initially, the amendment approach was preferred and endorsed by the Alternative Reference Rate Committee (ARRC) given that LIBOR cessation was in the distant future and further analysis and consideration was needed to be given to various potential successor benchmark rates. However, ARRC has recommended that all loan originations use the hardwired approach since the end of the third quarter 2020 to avoid a flood of amendments to be negotiated when LIBOR ends (see LIBOR Transition to SOFR in Credit Agreements). For a search of hardwired benchmark replacement provisions in Market Standards, click here. This clause should be read in conjunction with the following practice notes and clauses: • LIBOR Replacement Clause (Hardwired) • LIBOR Transition to SOFR in Credit Agreements • Interest Rate Provisions in Credit Agreements (SOFR) • Interest Rates and Fees Clauses (Credit Agreement) •The Client Asks: What Happens When LIBOR Ends? • Amendments and Lender Voting Right Issues in Credit Agreements For a full listing of key content covering amendments, consents, and other modifications for loan documents, see Amendments, Consents, and Waivers Resource Kit.