Federal LIBOR Transition Legislation: “Adjustable Interest Rate (LIBOR) Act” Is Enacted to Provide a Uniform, National Solution for “Tough Legacy” Contracts

Sullivan & Cromwell LLP - March 17, 2022
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On March 15, 2022, President Biden signed into law the “Consolidated Appropriations Act, 2022,” which enjoyed significant bipartisan support and contains, as Division U, the “Adjustable Interest Rate (LIBOR) Act” (the “LIBOR Act”).  The LIBOR Act provides a uniform national approach for replacing U.S. dollar LIBOR (“LIBOR”) as a reference interest rate in so-called “tough legacy” contracts (contracts that do not include effective fallback provisions, for example, because they have no provisions for a replacement benchmark or their fallback provisions would require the use of a LIBOR-based rate or a poll to determine a rate) for a time when LIBOR is no longer published or is no longer representative.  Under the LIBOR Act, references to the most common tenors of LIBOR (the overnight, one-month, three-month, six-month and 12-month tenors) in these contracts will be replaced as a matter of law, without the need to be amended, to instead reference a benchmark interest rate that will be identified in regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”).  The Federal Reserve must promulgate these regulations by September 11, 2022, the date that is 180 days after the statute’s enactment.  Any Federal Reserve-identified replacement benchmark will be based on the Secured Overnight Financing Rate (“SOFR”), a rate published by the Federal Reserve Bank of New York, and will include an appropriate “tenor spread adjustment” to reflect historical spreads between LIBOR and SOFR.  The statute also provides a “safe harbor,” under which a party that has discretion to select a replacement for LIBOR may choose to adopt the replacement benchmark identified by the Federal Reserve.

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