LIBOR Replacement Clause
(Bilateral, Hardwired)

Summary

This LIBOR replacement clause is used in credit agreements to automate the adoption of a substitute benchmark interest rate upon the cessation of LIBOR. It takes the "hardwired" approach and is meant to be used in bilateral credit agreements. This clause includes practical guidance and drafting notes. The U.K.'s Financial Conduct Authority, the regulator overseeing the London Inter-Bank Offered Rate (LIBOR), has said that it would no longer require banks to provide LIBOR estimates at the end of 2021. This means that LIBOR may cease to be a viable benchmark for loan transactions at that time. This LIBOR replacement clause should 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 lender is no longer able to ascertain LIBOR. This clause follows the so-called hardwired approach, which uses priority waterfalls, ranking the top choices of what rate replaces LIBOR, the tenor (interest periods) of that replacement, and the spread adjustment for the replacement. The other strategy, the amendment approach, relies on determinations made by the lender and borrower as LIBOR nears its presumed end. The amendment approach requires a subsequent amendment to the credit agreement, while the hardwired approach does not. Most deals have so far adopted the amendment approach, though the Alternative Reference Rate Committee (ARRC), which was established by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York and comprises financial institutions and banks, trade associations (such as the Loan Syndications and Trading Association (LSTA)), and official sector members, has recommended that all loan originations use the hard-wired approach since the end of the third quarter 2020 to avoid a flood of amendments to be negotiated when LIBOR ends. This clause should be read in conjunction with the following practice notes and clauses: • LIBOR Replacement Clause (Hardwired) • LIBOR Replacement Clause (Amendment) • The Client Asks: What Happens When LIBOR Ends? • LIBOR Transition to SOFR in Credit Agreements • Interest Rate Provisions in Credit Agreements (SOFR) • Interest Rates and Fees Clauses (Credit Agreement) • 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.