LIBOR Replacement Clause
(Hardwired)

Summary

This LIBOR replacement clause (hardwired) is used in credit agreements to automate the adoption of a substitute benchmark interest rate upon the cessation of LIBOR. This template includes practical guidance and drafting notes. 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 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 (hardwired) 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. This clause follows the so-called hardwired approach for LIBOR replacement, which uses priority waterfalls, ranking the top choices of what rate replaces LIBOR (or the then-current benchmark), 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 administrative agent and borrower as LIBOR nears its presumed end (see LIBOR Replacement Clause (Amendment)). The amendment approach requires a subsequent amendment to the credit agreement for LIBOR replacement, while the hardwired approach does not. 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 hardwired approach since the end of the third quarter 2020 to avoid a flood of amendments to be negotiated when LIBOR ends. 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 (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.