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Highlights
- In 2021, it was announced that the London Interbank Offered
Rate (Libor) was going to be discontinued. At that time, it was
noted that publication of the one-week and two-month U.S. dollar
Libor (USD Libor) maturities and all non-USD Libor maturities would
cease immediately after Dec. 31, 2021, with the remaining USD Libor
maturities ceasing immediately after June 30, 2023. In the U.S.,
the Alternative Reference Rates Committee (the ARRC) identified the
Secured Overnight Financing Rate (SOFR) as its preferred
alternative rate and published recommended fallback language for
new issuances of a variety of debt instruments. - On Dec. 15, 2021, the Florida Senate and the Florida House of
Representatives introduced draft legislation (SB 1246 and HB 925,
respectively) that addresses benchmark replacements for Libor for
Florida law-governed contracts where no fallback language or
insufficient fallback language is provided. - Florida’s proposal follows New York and Alabama, which have
passed similar legislation establishing a process to elect a
reliable replacement to Libor in circumstances where the contract:
1) does not contain any fallback provisions, 2) relies on any Libor
value to calculate an alternate rate, or 3) fails to identify a
specific fallback rate or person with the authority to select such
a rate.
The London Interbank Offered Rate’s (Libor) regulator, the
Financial Conduct Authority, and administrator, Intercontinental
Exchange Benchmark Administration (ICE), on March 5, 2021,
announced that the publication of the one-week and two-month U.S.
dollar Libor (USD Libor) maturities and all non-USD Libor
maturities would cease immediately after Dec. 31, 2021, with the
remaining USD Libor maturities ceasing immediately after June 30,
2023. In the U.S., the Alternative Reference Rates Committee (the
ARRC) identified the Secured Overnight Financing Rate (SOFR) as its
preferred alternative rate. SOFR is a measure of the cost of
borrowing cash overnight, collateralized by U.S. Department of the
Treasury securities, and is based on directly observable U.S.
Treasury-backed repurchase transactions.
Since ICE’s announcement, the ARRC has published recommended
fallback language for new issuances of a variety of debt
instruments. Such fallback language seeks to provide interest rate
provisions that will function upon discontinuation or loss of
representativeness of Libor and promotes consistency in defining
key terms such as benchmark transition events, benchmark
replacement and benchmark replacement adjustments. Notwithstanding
the foregoing, a notable amount of U.S. law governed contracts that
reference Libor do not include “fallback language” (i.e.,
language intended to provide an alternative reference rate or
otherwise address a permanent cessation of Libor) or such language
may not be robust. If the transaction documents for these financial
instruments contain language contemplating only a temporary
cessation of Libor, or no fallback language at all, the operation
of those instruments and their expected returns will likely
experience material changes when the rates are discontinued.
On Dec. 15, 2021, the Florida Senate and the Florida House of
Representatives introduced draft legislation (SB 1246 and HB 925, respectively) that addresses benchmark
replacements for Libor for Florida law-governed contracts where no
fallback language or insufficient fallback language is provided.
This Holland & Knight alert provides a brief summary of
Florida’s proposed law (the Law).
Proposed Florida Legislation
Which Agreements Are Covered by the Law?
- The Law covers “any contract, security or
instrument” governed by Florida law, including, without
limitation, any contract, agreement, mortgage, deed of trust,
lease, security (whether representing debt or equity, and including
any interest in a corporation, a partnership or a limited liability
company), instrument or other obligation (collectively, Covered
Agreements).
How Will the Law Impact Covered Agreements?
- No fallback or fallback based on Libor. If a
Covered Agreement that uses Libor as a benchmark either:
- contains no fallback provisions, or
- contains fallback provisions that result in a benchmark
replacement, other than a “recommended benchmark
replacement” (defined below) that is based in any way on any
Libor value,
then, on the date on which a) the administrator of Libor
permanently or indefinitely ceases to provide Libor or b) the
regulatory supervisor for the administrator of Libor announces that
Libor is no longer representative,
- the “recommended benchmark replacement” shall, by
operation of law, replace Libor as the benchmark for such Covered
Agreement
- “recommended benchmark replacement” means, with
respect to any particular type of Covered Agreement, a benchmark
replacement based on SOFR that must include any recommended spread
adjustment and any benchmark replacement conforming changes that
have been selected or recommended by a relevant recommending body
with respect to such type of Covered Agreement
- “recommended benchmark replacement” means, with
- Fallback based on quotations. If a Covered
Agreement that uses Libor as a benchmark contains any fallback
provisions that provide for a benchmark replacement based on or
otherwise involving a poll, survey or inquiry for quotes or
information concerning interbank lending rates or any interest rate
or dividend rate based on Libor, those provisions shall be void and
without any force or effect. - Fallback selected by a party. If a
Covered Agreement that uses Libor as a benchmark contains fallback
provisions that permit or require the selection of a benchmark
replacement that is a) based in any way on any Libor value or b)
meant to be a commercially reasonable replacement for and
commercially substantial equivalent to Libor, then
- the party with the right to select the benchmark replacement
(the determining person) shall have the authority, but shall not be
required, to select, on or after the occurrence of a “LIBOR
discontinuance event” (as defined in the Law) the
“recommended benchmark replacement” (defined above) as
the benchmark replacement
- the party with the right to select the benchmark replacement
What Is the Impact of Replacing the Benchmark with the
“Recommended Benchmark Replacement” Pursuant to Any of
the Above?
- Conforming changes. All benchmark replacement
conforming changes that are applicable (in accordance with the
definition in the Law of “benchmark replacement conforming
changes”) to such recommended benchmark replacement must
become an integral part of such Covered Agreement by operation of
law. - No liability. No person shall have any
liability for damages to any person, or be subject to any claim or
request for equitable relief, arising out of or related to the
selection or use of a recommended benchmark replacement or the
determination, implementation or performance of benchmark
replacement conforming changes and such selection or use of the
recommended benchmark replacement or such determination,
implementation or performance of benchmark replacement conforming
changes shall not give rise to any claim or cause of action by any
person in law or in equity. - No amendment or prejudice. The selection or
use of a recommended benchmark replacement or the determination,
implementation or performance of benchmark replacement conforming
changes may not be deemed to:
- be an amendment or modification of any Covered Agreement,
or - prejudice, impair or affect any person’s rights, interests
or obligations under or in respect of any Covered Agreement
- be an amendment or modification of any Covered Agreement,
- No impairment or discharge. None of: 1) a
Libor discontinuance event or a Libor replacement date; 2) the
selection or use of a recommended benchmark replacement as a
benchmark replacement; or 3) the determination, implementation or
performance of benchmark replacement conforming changes shall:
- be deemed to impair or affect the right of any person to
receive a payment, or affect the amount or timing of such payment,
under any Covered Agreement, or - a) discharge or excuse performance under any Covered Agreement
for any reason, claim or defense, including, but not limited to,
any force majeure or other provision in any contract,
security or instrument; b) give any person the right to
unilaterally terminate or suspend performance under any Covered
Agreement; c) constitute a breach of a Covered Agreement; or d)
void or nullify any Covered Agreement
- be deemed to impair or affect the right of any person to
Exclusions
- By its terms, the Law does not alter or impair:
- any written agreement by all requisite parties that,
retrospectively or prospectively, a Covered Agreement shall not be
subject to the Law - any Covered Agreement that contains fallback provisions that
would result in a benchmark replacement that is not based on Libor,
including, but not limited to, the prime rate or the federal funds
rate - any Covered Agreement as to which a determining person does not
elect to use a recommended benchmark replacement or as to which a
determining person elects to use a recommended benchmark
replacement prior to the occurrence of a Libor discontinuance
event, or - the application to a recommended benchmark replacement of any
cap, floor, modifier or spread adjustment to which Libor had been
subject pursuant to the terms of a Covered Agreement
- any written agreement by all requisite parties that,
What’s Next?
Florida’s proposal follows New York and Alabama, which have
passed similar legislation establishing a process to elect a
reliable replacement to Libor in circumstances where the contract:
1) does not contain any fallback provisions, 2) relies on any Libor
value to calculate an alternate rate, or 3) fails to identify a
specific fallback rate or person with the authority to select such
a rate.
On Dec. 8, 2021, the U.S. House of Representatives passed The Adjustable Interest Rate (LIBOR) Act,
which provides a replacement interest rate for those loans,
securities and other financial instruments which rely on Libor and
will not be able to continue to function as originally intended
after it is discontinued. The legislation has been narrowly
tailored so that it will not affect Libor-based contracts which
contain provisions that allow them to easily transition to a
pre-agreed upon alternative interest rate. If it is signed into
law, it would supersede and preempt the statutes passed in the
states, including any law that may be enacted in Florida based on
the proposal described herein or otherwise.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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