Libor Transition Panel Issues Fallback Language for Bilateral Business Loans, Securitizations

The Alternative Reference Rates Committee today issued its fallback language recommendations for bilateral business loans and securitizations that reference the U.S. dollar London Interbank Offer Rate. The ARRC—a group of market participants convened by the Federal Reserve—previously issued fallback language for floating rate notes and syndicated notes. With Libor’s future beyond 2021 in doubt, the ARRC is developing plans to facilitate the transition to its recommended alternative rate, the Secured Overnight Financing Rate.

“It is imperative that market participants stop writing contracts that do not account for the discontinuance of LIBOR. Both today’s fallback language and the set issued last month provide essential tools for writing robust contracts,” said Morgan Stanley’s Tom Wipf, who chairs the ARRC. “It’s time that all market participants transition their products away from U.S. dollar Libor where possible and we encourage the use of SOFR now, but those that continue to use Libor need to make sure they have very strong fallbacks in place.”

The final recommended language follows draft language released last fall for public comment. For bilateral business loans, the ARRC recommended two approaches to fallback language. One would provide a streamlined amendment mechanism to implement a replacement benchmark in the future; the other would be a “hardwired approach” that would replace Libor with a version of SOFR, providing more upfront clarity. For securitizations, the ARRC proposed a hardwired approach regarding triggering events and the waterfall for rate determination.


About Author