The Measured Migration Away From LIBOR

Following the 2008 financial crisis and years of growing questions about the reliability, transparency, and credibility of indexing credit lines to the London Interbank Offered Rate (LIBOR),[1] financial regulators and consumers sought out ways to transition away from interbank-offered rates, which are often based on the (sometimes questionable) judgment of a panel of key banks, toward “risk-free rates” (RFRs), which are based on more robust data from actual lending transactions in the active repurchase market.   

After over a decade of spirited consideration, discussion, and coordination between numerous financial bodies across global markets, the first real winds of change began to blow. On March 5, 2021, the entity responsible for regulating LIBOR, the UK’s Financial Conduct Authority (FCA), announced that the future dates upon which various LIBOR settings would stop being published and become wholly unavailable.[2] On December 31, 2021, the FCA ceased publication of the four non-U.S. dollar (USD) LIBOR settings (i.e., the British pound, Japanese yen, Swiss franc, and euro), along with the one-week and two-month tenors of USD LIBOR.[3] On March 15, 2022, President Joseph Biden signed the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act) into law, ensuring the continuous movement of the United States financial market away from LIBOR and outlining the federal plan for the imminent post-LIBOR future.[4] Most recently, on June 30, the overnight and 12-month U.S. LIBOR rates ceased permanently, and the FCA stopped publishing the one-, three-, and six-month tenors of USD LIBOR settings as representative rates, although it did compel the ICE Benchmark Administration (ICE) to continue to publish such tenors on a non-representative, synthetic basis until at least September 30, 2024 (i.e., “synthetic USD LIBOR”). Thus, LIBOR as we know it was officially retired and sent out to pasture.[5]

Although market participants had debated for years about which reference rate should potentially take LIBOR’s place, industry leaders generally agreed that the Secured Overnight Financing Rate (SOFR) was the most attractive and viable long-term successor for a variety of reasons.[6] SOFR derives from a backward-looking secured rate that does not carry any element of credit risk. Each business morning, the Federal Reserve Bank of New York publishes SOFR, a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, based on data collected from roughly $1 trillion worth of daily repurchase transactions.[7] Relying on concrete data points from such a large underlying transaction volume makes SOFR relatively manipulation-proof, stable, and reliable in the face of a wide range of market conditions, representing a welcome change from LIBOR, which was a forward-looking unsecured rate that factored in counterparty credit risk and was based mainly on interest rate quotes from subjective input given by specific panel banks.[8]  

One type of SOFR in particular, Term SOFR (Term SOFR), has emerged as the favorite and most commonly used replacement rate for LIBOR in the current corporate lending market.[9] Term SOFR is derived by looking at where futures contracts tied to SOFR trade relative to current SOFR rates, essentially reflecting a “betting line” for what SOFR will average over any given term. Moreover, Term SOFR provides a mechanism for floating-rate loans to reset in advance, at the beginning of an interest period, with a term rate,[10] and the fact that Term SOFR is available in one-, three-, six-, and 12-month tenors further adds to its flexibility and appeal.

In fact, the industry’s preference for Term SOFR was strong enough that the LIBOR Act itself clearly designated Term SOFR (as published by the Chicago Mercantile Exchange) as the benchmark replacement for any LIBOR contract that 1) contains no non-LIBOR-related fallback provisions, 2) contains a fallback provision that insufficiently identifies a specific benchmark replacement or a person with the authority to determine a benchmark replacement, or 3) identifies a person with the authority to determine a benchmark replacement but such person has not selected a replacement rate by the specified date.[11],[12] In all other scenarios, depending on the contractual provisions at hand, either the parties’ agreed-upon replacement rate or some form of synthetic USD LIBOR would apply.[13] Even though both financial and regulatory thought leaders settled upon SOFR as LIBOR’s heir apparent, the path forward still contained, and to some extent still does contain, many obstacles and remaining questions for borrowers and lenders attempting to adapt in the face of such change.

LIBOR’s Final Chapter and Its Lasting Effects

Before the sunset of USD LIBOR on June 30, a hefty majority of the financial industry voluntarily adopted SOFR as its benchmark for newly issued U.S. loans.[14] For these early movers who were able to amend their outstanding loans that predated the transition to SOFR (i.e., “legacy” LIBOR loans) before LIBOR’s cessation, it is probable that they were able to secure smaller adjustments than those that were not, in addition to locking in such preferred rates at earlier dates, resulting in lower debt servicing costs over time. However, even just before the sun went down on LIBOR, numerous legacy LIBOR loans remained unmodified by replacement rate amendments and still referenced LIBOR. As a matter of fact, prominent global credit rating agency Moody’s estimated that roughly $900 billion worth of low-rated corporate loans were still priced using LIBOR as recently as May 19.[15] Based on the lagging rate of the transition away from LIBOR, one research analyst for U.S. credit strategy at Barclays even theorized that between 40 percent and 50 percent of low-rated corporate loans would still be tied to LIBOR right before July 1.[16]

If not for the recent interest rate hikes by the Federal Reserve and resultant higher funding costs for borrowers, many of these legacy LIBOR loans might have been migrated to SOFR sooner via organic incremental financing, refinancing, or repricing transactions. However, given lower levels of borrowing and generalized financial anxiety and uncertainty in the past year, there were fewer natural opportunities to make the switch from LIBOR and choose an optimal replacement rate at a cheap and conveniently timed juncture before June 30 of this year than some might have hoped.[17] Thankfully though, key recommendations from the Federal Reserve Board’s industry body, the Alternative Reference Rates Committee (the ARRC) and the LIBOR Act’s provisions, coupled with the Federal Reserve Board’s final rule implementing the LIBOR Act, simplified the transition process for a good proportion of legacy LIBOR loans.[18]

According to research group Covenant Review’s analysis derived from the Credit Suisse leveraged loan index, roughly 56 percent of legacy LIBOR loans allow for a transition away from LIBOR via some form of “amendment approach” occurring via certain fallback amendments.[19] Of that 56 percent, about 11 percent directly feature the ARRC’s “amendment approach” form language, and the remaining 45 percent reflect amendment approach language that predates the ARRC form language but has a similar effect, other than the fact that most of these arrangements do not control the timing of the transition process, while the ARRC has temporal transition parameters.[20] In either amendment approach, the lender (or administrative agent, if applicable) and the borrower typically must mutually agree upon an alternate rate of interest and credit spread adjustment (if any) after contemplating prevailing market conditions and regulatory guidance, before then providing notice to the lenders party thereto, who usually must simply not object in writing to said amendment in order for it to become effective. Approximately 36 percent of legacy LIBOR loans provide for an automatic switch to SOFR after LIBOR’s cessation, relying on hardwired fallback language from the ARRC’s detailed guidelines, which include a range of SOFR adjustments for various time frames.[21] Finally, about 8 percent of legacy LIBOR loans have no permanent LIBOR succession language whatsoever and instead contain language indicating that in the absence of LIBOR, the loans will fall back to some kind of “Alternative Base Rate” usually defined as the greater of the Prime Rate or the Federal Funds Effective Rate plus 50bps on any reference date.[22]

Regardless of what kind of legacy LIBOR contract parties may still be subject to, in order to successfully complete the transition away from LIBOR and avoid unanticipated business consequences in the process, it is important that parties reassess existing contracts and take action where needed.

Our Recommendations for the Future

At a high level, depending on your circumstances, we recommend that you consider taking one or more of the below actions:

  1. If you are party to an unremediated legacy LIBOR contract that does contain some form of rate replacement language, you should thoroughly review the existing agreement in order to determine whether one of the two amendment approaches or the ARRC-hardwired fallback approach applies now that LIBOR has ceased being published as of June 30.
    1. If your contract contains language that adopts the amendment approach deriving from either the ARRC’s amendment approach form provisions or similar language that originated prior to the development of the ARRC forms, then you should ensure that, when the parties amend the agreement to replace LIBOR with an alternate benchmark rate, they (through the administrative agent, if applicable) appropriately post the proposed amendment for review by the lenders and ascertain that the parties (or the administrative agent, as applicable) have obtained the adequate consent levels required in connection with the amendment. Once the aforementioned steps have been taken, the amendment will take effect and the alternate benchmark rate will apply to the loans in question. Given the importance of lender consent in the process of these amendments, it is imperative to be, and remain, responsive to lender outreach around remediation work. In order to simplify the sometimes complicated rate selection and amendment process, the Loan Market Association has produced exposure drafts of facility agreements that allow market participants to adopt risk-free rates as the basis of interest calculation.
      1. If your contract is linked to the ARRC’s “amendment approach,” then you should also comprehensively review the ARRC’s published guidance on fallback amendments and required timing milestones. Fallback timing may vary based on the applicable lookback period and loan mechanics at hand, so we recommend paying close attention to the relevant interest reset and interest election provisions at hand.
    2. If your contract contains the ARRC’s hardwired fallback language in the absence of LIBOR, then the FCA’s announcement on July 3 that all tenors of USD LIBOR were no longer representative of the markets they previously sought to measure served as a trigger event under the ARRC’s forms. This trigger event resulted in CME Term SOFR plus the applicable standard ARRC or International Swaps and Derivatives Association (ISDA) spread adjustment contractually replacing LIBOR as the applicable benchmark in your contract. [23] Again, you should carefully review the ARRC’s available guidelines for greater detail and direction on the complexities and consequences of this automatic shift.
  2. If you are party to an unremediated legacy LIBOR contract that, after disregarding any benchmark replacement language based in any way on LIBOR, 1) does not contain any fallback or rate replacement language or 2) contains fallback language, but such language a) insufficiently identifies a specific benchmark replacement or a person with the authority to determine a benchmark replacement or b) identifies a person with the authority to determine a benchmark replacement but such person has not selected a replacement rate, then the LIBOR Act applies, and subsequently, CME Term SOFR plus the appropriate ARRC/ISDA spread adjustments apply to your loans.[24] Therefore, you should familiarize yourself with the provisions of the LIBOR Act and verify that you are in compliance with all regulatory rules and recommendations or whether any applicable safe harbor provisions may shield you against liability under potential lawsuits.
  3. If you are party to an unremediated legacy LIBOR contract that contains no intentional and contractual LIBOR fallback language but instead provides for reversion to an Alternative Base Rate in the event that USD LIBOR becomes unavailable, then that Alternative Base Rate, often defined as the greater of the Prime Rate or the Federal Funds Effective Rate plus 50bps on any reference date, most likely applies.[25] If it does, then you are currently subject to a rate that is likely much higher than LIBOR was, and you may want to consider executing an amendment to choose a lower interest rate in the near term, especially if you are highly cost-sensitive.
    1. However, if your legacy LIBOR contract has not already transitioned to an Alternative Base Rate or has no possible other means to fall back, then synthetic USD LIBOR might apply, depending on the governing law of the underlying contract and the specific contractual provisions. If synthetic USD LIBOR applies, then the rate will be equivalent to CME Term SOFR plus the appropriate ARRC/ISDA spread adjustments, but parties need to be aware that ICE will only continue to be publish tenors of synthetic USD LIBOR until September 30, 2024.[26] Thus, if your legacy LIBOR loans are subject to synthetic USD LIBOR, you will need to continue to push forward with active transition plans to select a more permanent replacement rate ahead of that set deadline.
  4. As a general principle, it is paramount that you also confirm whether your current internal systems and processes can structurally and technologically accommodate any new interest rate that your loans may now be subject to. This is especially true when considering the adoption of any administrative, operational, or technical “Benchmark Conforming Changes,” as such changes can take time, resources, and alterations in existing policies and procedures to successfully implement.
  5. Additionally, if your loan facility is supported by any securities, guarantees, or other forms of collateral that secure the debt obligations under such facility, then the transition from LIBOR to a successor rate could impact those arrangements as well. Any effects of LIBOR’s cessation on securities, guarantees, and other forms of collateral would be determined based on the facts and circumstances present in any given transaction.
    1. Perhaps the foremost consideration at hand is whether any securities or guarantees, which were initially given in support of obligations under related financing documents that are now (or will be) amended to replace LIBOR, shall automatically continue to secure or guarantee such obligations as amended, with no further action required by the parties thereto. Given the fact- and jurisdiction-specific nature of this inquiry, we strongly advise that affected parties conduct further research and seek more individualized guidance as they deem necessary.
      1. However, as an example, for legacy LIBOR contracts and related securities and guarantees governed by New York law, we suggest that parties initially analyze the financing documents and the construction and secured obligation language therein in order to see whether any security or guarantee is expressed to extend to liabilities due thereunder “as amended, amended and restated, supplemented or otherwise modified from to time,” or words of similar effect. If such language is present, then barring any unforeseen contrary facts, parties can be reasonably confident that their securities and guarantees will continue to secure the obligations under their financing documents, even if such documents have been amended to transition away from LIBOR or are otherwise amended at a future point.
  6. In any case, you should consider whether the currently applicable interest rate found in your existing loan contracts remains the most favorable rate for your loans in terms of comparative pricing, provisional mechanics, latest industry trends and guidance, and other considerations. If such benchmark is no longer appropriate for your business goals, then contemplate whether there exists a convenient future opportunity where you could act to amend your contract to select a more well-suited rate of interest along with accomplishing other action items or alternatively, actively pursue a mechanical, rate-focused amendment on its own if your business needs are substantial or urgent enough. Regardless of your circumstances, if you have any doubts about your current interest rate arrangements, it is always a good idea to consult with professional advisers as needed or desired.


Lowenstein Sandler actively represents corporate borrowers with loan documentation and amendments, and our attorneys have assisted numerous clients with their transition to various replacement rates and forms of SOFR in the years leading up to LIBOR’s cessation. For further information and guidance on how to efficiently navigate the transition away from LIBOR and what to consider when choosing the optimal alternative reference rate for your loans, please reach out directly to Lowell Citron, the chair of  Lowenstein Sandler’s Debt Finance Group, or reach out to your regular Lowenstein Sandler contact.

[18] (last updated May 2, 2023);