On March 25, 2021, the Alternative Reference Rates Committee (ARRC) released supplemental recommendations for its hardwired fallback language for US dollar denominated syndicated and bilateral loans. The ARRC’s supplemental recommendations follow the certainty on fallback timings and economics afforded by the March 5, 2021 announcements by ICE Benchmark Administration, the UK Financial Conduct Authority and ISDA regarding the cessation of LIBOR.

The updated language supplements and simplifies the hardwired fallback language recommended by the ARRC for LIBOR-linked loans in 2020 and is intended to provide further transparency into spread adjustments that will be applied once the fallback rates apply. The simplified version of the ARRC’s hardwired loans fallback is intended to support a seamless transition away from USD LIBOR and encourage the voluntary adoption of the ARRC’s recommended alternative reference rate, SOFR and hardwired fallback language. Key changes to the language include:

• Following the certainty that one-month, three-month, six-month and twelve-month USD LIBOR will continue as representative rates until June 30, 2023, the ARRC has simplified the triggers for actual transition to the Benchmark Replacement.
• Certain defined terms have been removed and others consolidated.
• For loans that transition from USD LIBOR to Daily Simple SOFR, the new language specifies a payment period, providing clarity as to which spread adjustment will be utilised.
• The spread adjustment values fixed by the March 5 announcements have been added to the definition of “Benchmark Replacement”.
• The pre-cessation language has been amended to align it more closely with the drafting of “Index Cessation Event” in ISDA’s standard documentation.

The ARRC has also provided guidance on the new fallback provisions and considerations for market participants when reviewing and implementing the fallback language. The guidance covers both syndicated loans and bilateral loans.

Market participants are now able to use the original 2020 or simplified 2021 versions of the ARRC’s fallback language, with both versions leading to the same outcome. The supplemental versions have been hailed by ARRC Chairman Tom Wipf as a “critical additional resource for accelerating market participants’ preparedness for USD LIBOR’s inevitable end”.