The benchmark replacement clause may contain certain terms that are not already defined in the credit agreement and must be added with appropriate definitions to be used in the clause. These defined terms may include “benchmark”, “benchmark replacement”, “benchmark replacement date adjustment”, “benchmark transition event” and “benchmark downtime”. These defined terms are fairly standardized, but need to be tailored to the specific transaction. By the way, an alternative benchmark may require a spread adjustment so that the replacement rate matches the replaced benchmark. ARRC recommended spread adjustments for the first transition from LIBOR to SOFR in the future. In addition, an adjustment of the spread between the term SOFR and the daily simple SOFR or any benchmark and its replacement may be necessary. The variance adjustment should be included in the succession clause or related definitions. The LSTA definition of the benchmark transition event for the purpose of triggering a benchmark exchange means the occurrence of one or more of the following events: Benchmark replacement is generally triggered when certain events occur that are typically listed in the definition of benchmark transition event or a similar term. Triggering events include: Reference substitution clauses typically contain a provision that allows the managing agent to change the definition of the interest period when a particular maturity of a maturity rate is not available, but other maturities are still available. A benchmark may not become available (1) if the benchmark content is not displayed on a screen or information service used by the management agent to determine the benchmark, or (2) if the regulator publicly announces to the benchmark administrator that a benchmark content will not be representative of the market. This allows the Management Agent to revise the interest periods offered against a maturity rate (including the SOFR term) without requiring additional consent from other parties and without replacing the reference rate in its entirety. Other terms and definitions of LSTA benchmark replacement parameters include consistent changes to loan documents, standards applicable to the managing agent at the time of determination, unavailability of a benchmark maturity and procedure during a period of benchmark unavailability.
Typically, benchmark replacement clauses include a provision that allows the managing agent to make changes to the loan agreement or other loan documents to replace the benchmark. Changes include technical, administrative or operational changes, such as definitions, that may be required to implement the reference rate change. These changes are made by the management officer without requiring the consent or action of another party. Another consideration: many loan agreements explicitly exclude swap agreements from the definition of credit documents for the purposes of reference substitution provisions. The parties may stipulate that swap agreements should include their own fallback interest rates instead of using the reference substitute in the loan agreement. For examples of definition clauses to be used in loan agreements, see Reference replacement clauses in credit agreements, which generally specify the triggers for the replacement of the reference rate, the replacement rate or cascade of potential replacement rate options, the level of consent required of the parties, a provision for consistent amendments to loan documents. a clause allowing the maturity of an interest rate to be changed without changing the benchmark and definitions necessary to implement the benchmark replacement clause. Those clauses normally provide for the replacement of the benchmark rate if the benchmark administrator ceases to publish such an interest rate or if that benchmark rate is no longer representative of the market. If no replacement rate is applied, loans at the relevant interest rate shall be converted at the base rate.
The base interest rate has always been higher in the past and was not desired by borrowers for anything other than short-term financing. In the years leading up to LIBOR`s shutdown, benchmark establishment clauses focused on replacing LIBOR. Triggering events were based on LIBOR termination, and determinations were usually wired (automatically to the trigger) or required change. Since the new loan agreements include SOFR or other alternative interest rates as benchmarks, the benchmark setting clauses have also been replaced by provisions that do not affect LIBOR. Although benchmark replacement clauses are not as critical as when replacing LIBOR due to termination, they remain relevant if the SOFR or any other interest rate used in a loan agreement does not prove to be an available or representative benchmark.
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