Posted on 03 May 2021
Discontinuation of LIBOR and Alter Domus’ Continued Response
As of March 5, 2021, US and UK regulators and LIBOR’s administrator made a series of announcements regarding the end of US Dollar LIBOR. They call for no new LIBOR contracts after the end of 2021, while giving legacy contracts time to wind down. ICE Benchmark Administration (“IBA”) announced that it will cease publication of the major USD LIBOR tenors as of June 30, 2023 (overnight, 1M, 3M, 6M, 12M) and two less common USD LIBOR tenors as of December 31, 2021 (1 week, 2M). It will also cease publication of all sterling, euro, Swiss franc and Japanese yen settings as of December 31, 2021. As such, Alter Domus and its related entities and affiliates, each in its role as sub-administrative agent and/or named administrative agent, has been preparing for this discontinuation as noted herein.
Alter Domus, as a non-lender agent, will defer to the market and its client base on what will replace LIBOR. In most cases, this currently includes a general reference to a “market standard” backup replacement (most likely SOFR for the US, and SONIA for the UK), and/or the automatic conversion to either a Base Rate or Cost of Funds Rate. Alter Domus has been attentive to the LSTA’s proposed changes and language regarding SOFR, and LMA’s proposed changes in relation to SONIA, although most loan agreements have yet to include specific reference to either as the agreed backup rate. Alter Domus currently actively reviews new loan agreements to make sure that if LIBOR is an option, there is a “fallback provision” in the document, whether an automatic change or an agreement to amend at a later date. Most importantly, Alter Domus ensures that the agent is involved in determining this backup rate so that it’s a rate Alter Domus, in its named agent or sub-agent capacity, will be able to access easily.
Notwithstanding the foregoing, Alter Domus acknowledges that each lender group and borrower will have a differing approach to the replacement rate and the fallback language. Alter Domus is prepared to assist with the review and onboarding of the numerous amendments we anticipate being drafted that will specifically replace LIBOR and update the economics of the loan. As an additional step, Alter Domus will be reviewing each of its agented deals to ensure that if LIBOR is an option, there is backup language included (either Base Rate, Cost of Funds Rate, or specific LIBOR replacement language). Upon said review, Alter Domus plans to reach out to the client groups if there are any loans that do not contain a clear backup.
Regarding the technical agency loan system updates required with cessation of LIBOR and establishing the new application of SOFR and SONIA, Alter Domus has been participating in the Alternative Reference Rate Committee (the “ARRC”) meetings and has created an internal working group committee to manage the changes required. Currently, based on ARRC recommendations and discussions with other partners, Alter Domus has a multi-phase plan to implement the changes necessary to handle SOFR and SONIA.
We have progressed through the design and testing phase of the multiple system changes including but not limited to:
- Updating accruals for simple and compounding rate/balance SOFR/SONIA;
- Margin adjustments;
- Lookback days;
- Observation shifts; and
- Notice changes
We are pleased to announce that these changes have been incorporated into our agency loan system (“Agency360”) and deployed into production. Alter Domus can handle SOFR and SONIA loans as of March 19, 2021.
Head of Sales & Relationship Management, Debt Capital Markets, Europe
Head of Debt Capital Markets, North America
Head of Agency, Successor & Turnaround, North America