Given the monumental task that will be involved in amending every single loan agreement with a LIBOR interest rate, it's worth considering what such an amendment should look like to accomplish the task successfully.
Until now, the conversation around LIBOR replacement amendments has mostly been about amending existing loan agreements or including language in new loan agreements to address what happens when LIBOR goes away. For the most part, the language that has been used does not establish any definitive replacement, but rather the process and the principles that will be followed by the parties to transition to a new rate. The options have broadly been framed in terms of an amendment approach, where the lender and borrower negotiate the terms of the new rate; a hardwired approach, where the parties establish a waterfall of rates to be applied in order of preference, with the implementing conforming changes to be mostly set by the lender; and a lender discretion approach, where the lender generally decides the replacement rate and conforming changes to be made with limited or no input from the borrower. All of this language is merely a placeholder for the real replacement language when LIBOR actually ceases or is close to ceasing to exist and the actual terms of the new rate are added to the loan agreement.
With LIBOR continuing until the end of 2021 and the market still determining the details of how the apparent successor SOFR rate will work, the drafting, negotiation and execution of definitive replacement amendments is not quite here yet―but is not too far in the future either. Industry organizations like the LSTA are working on preparing sample amendment forms to guide the market soon. Given the monumental task that will be involved in amending every single loan agreement with a LIBOR interest rate, it's worth considering what such an amendment should look like to accomplish the task successfully.
In a perfect world, best practices for amendments would use surgical precision to delete every LIBOR definition from an agreement and go section by section, and perhaps even sentence by sentence or line by line, to delete the use and effect of LIBOR throughout the agreement, then insert the definitions and provisions for SOFR (or AMERIBOR or some other rate, if the parties choose that as the replacement rate). The effectiveness of such an amendment depends upon it being perfectly accurate. If a lender's template loan form uses the term "LIBOR" and a particular loan agreement in the portfolio was modified to define the term as "Adjusted LIBOR," an amendment drafted based on the template will not work to delete the term from that agreement. If the interest periods provision is in Section 2.3 of the template, but now in Section 2.4 of a particular loan agreement because another section was added, a deletion of Section 2.3 and replacement with a new SOFR-based Section 2.3 can create all sorts of problems. These types of errors might be caught during the negotiation process, or might not.
This traditional amendment approach requires detailed due diligence on each and every loan agreement to catch and catalog all the unexpected variances. As demonstrated above, customized amendments are required at least for the loans with variances. Tracking these variances and getting them right requires a heightened level of loan due diligence and review―not only by the lender's counsel, but by the borrower's counsel as well―to make sure the amendment is correct. All of this obviously takes time, and time is money.
Is all of this really necessary? At the end of the day, LIBOR is going away. If the concept is to delete LIBOR from the agreement, does it really matter whether the agreement uses the term LIBOR or Adjusted LIBOR, or something completely different like Eurodollar Rate? If the concept is to delete LIBOR interest periods and replace them with SOFR interest periods, does it really matter that the applicable provision is in Section 2.4 of a particular loan agreement rather than Section 2.3?
This is not to suggest that sloppy drafting should be tolerated just because the intended effect is clear even though the actual drafting is wrong. Rather, it suggests that a different kind of amendment may be better at tackling the challenge.
An Alternative Amendment Approach
As complicated as all of the variations are in LIBOR terms and provisions across the multitude of different types of loan agreements out there, the concept is simple: LIBOR is going away and will be replaced by SOFR. All LIBOR terms and provisions will be deleted and replaced with new SOFR terms and provisions. Why can't the amendment just say that?
The drafting required to accomplish this concept isn't literally that simple—it requires some careful thought. However, properly done, it should work. Rather than try to specify all of the possible terms and provisions that might be used in the portfolio of loan agreements to be amended, describe them generally by what they do, with a few illustrative examples for clarity. Once the terms and provisions have been described in this manner, they can be deleted wherever they appear in the loan agreement without needing to refer to specific section numbers. Then, add the new SOFR terms and provisions in a new section, rather than try to insert each provision in the same place where the comparable LIBOR provisions were, and provide generally that SOFR-based loans will be available to the extent that LIBOR-based loans used to be available, subject to the new requirements in the SOFR provisions.
A generic, descriptive amendment like this could be applied universally across a broad variety of LIBOR loans and loan forms in a lender's portfolio―from short, fill-in-the-blank forms that are rarely negotiated to syndicated loan agreements spanning hundreds of pages. There would be little need for the lender's counsel or the borrower's counsel to know or exercise due diligence on the terms and provisions of all the countless loan documents. Since the amendment isn't trying to specify all the exact terms and provisions used, the amendment should not need to be customized for each loan agreement that varies from a lender's loan templates. A standardized form is much faster and easier to document and negotiate, for the lender's counsel and the borrower's counsel. Moreover, the concept is easy for bankers to explain and for executive officers of borrowers to understand, and the descriptive amendment language can more closely mirror the concept. All of this can foster a more simplified and efficient amendment process for lenders and borrowers. The cost should be significantly less than a traditional diligence and amendment process, making it more palatable for borrowers to honor their obligations to pay for the loan amendments. And operationally, applying one template of new SOFR terms can allow a lender's entire loan portfolio to be consistent going forward.
With all of these potential benefits, does it matter that a universal form of generic, descriptive amendment will not have the technical precision of a customized loan amendment?
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