U.S. federal legislation for LIBOR transition
- October 5, 2021
Real Estate | Kennett Square, PA
The U.S. House Financial Services Committee, Ways and Means Committee, and Education and Labor Committee are considering legislation that would provide a framework to determine the replacement rate in contracts that reference LIBOR but do not include fallback language identifying a replacement benchmark.
- Adjustable Interest Rate (LIBOR) Act of 2021 has been introduced into several U.S. House committees
- The pending legislation applies only to contracts without fallback provisions, that rely on any LIBOR value to calculate an alternate rate, or fail to identify a specific rate
- The replacement benchmark for contracts subject to this legislation will automatically incorporate the SOFR-based rate
The discontinuation of LIBOR is on the horizon, yet there remains a notable amount of U.S. law-governed contracts that reference LIBOR but do not include robust fallback language identifying a replacement benchmark. In an effort to avoid discord, a solution in the form of the Adjustable Interest Rate (LIBOR) Act of 2021 has been introduced into the House Financial Services Committee, Ways and Means Committee, and Education and Labor Committee. If enacted, this legislation would provide a framework for how the replacement rate would be determined. However, this legislation does not apply to all USD LIBOR indexed contracts. Rather, it would apply in specifically enumerated 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. This includes tough legacy contracts that cannot easily transition to an alternate rate, including where consent of all parties is required to amend the terms of such contract. While some states (New York and Alabama) have passed laws establishing a process to elect a reliable replacement to LIBOR, federal legislation would apply this procedure nationwide.
The remaining tenors of USD LIBOR will cease to be published after June 30, 2023. Following this LIBOR Replacement Date, or earlier if determined by the Board of Governors of the Federal Reserve System that any LIBOR tenor is non-representative of the underlying rate, the replacement benchmark in these particular contracts will automatically incorporate the SOFR-based rate (including spread adjustment) recommended by the Fed. The implementation of such changes would give these contracts safe harbor to continue to operate without discharge or contractual termination.
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