In the case of a credit contract that was transferred to SOFR in accordance with the anticipated opt-in provisions, the margin adjustment would be reset at the beginning of each interest period; However, if the spread adjustment becomes static (i.e. after a mandatory transition event), the spread adjustment would be fixed on the remaining term of the credit contract. Financial institutions should identify the product sectors that will be affected by the expiration phase of LIBOR and how the old fallback language works in contracts for these products. This is particularly important for contracts due after 2021; However, it is worth reviewing all libor contracts, as libor may be unreliable or no longer available before its scheduled shutdown at the end of 2021. Libor could, for example, deteriorate to the extent that its liquidity or beneficial effects on market players are negatively affected. At this point, regulatory oversight of the libor administrator could publicly announce that benchmark is no longer representative of the underlying market. In addition to the three triggers, the ARRC contained an early opt-in mechanism that can be used to switch to the alternative reference course, while LIBOR is still being published. This is reflected in the definition of early opt-in. Early opt-in may be triggered by the administrative officer or borrower if at least “five] us dollar credit facilities open to the public and ongoing with a benchmark interest rate based on SOFR are available. Parties to the agreement may choose a different threshold from the “five] threshold, as this figure must show that there are sufficient SOFR agreements on the market to provide “objective and clear direction.
An early opt-in would depend on the approval of majority lenders in the same way as the “modifying” approach: the administrator must inform lenders of the early opt-in, which will then have five working days to oppose such an option. If no objections have been raised by the majority lenders until 5 p.m. .m the fifth business day, the early election of the opt-in will take effect from the sixth business day following notification. The early opt-in mechanism should help reduce the backlog of credits that must be ignored after the end of the libor, reducing the risk of market disruption. As the underlying transactions in SOFR are fully secured by U.S. Treasury bonds, SOFR is an almost risk-free interest rate and does not reflect the credit risk of banks borrowing on the basis of this rate. Therefore, in order to make SOFR more comparable to LIBOR, the recommended language for ARRC contains a spread adjustment at each stage of the reference replacement waterfall. The reference replacement adjustment would be different for each LIBOR tenor and selected at the time of selection of the reference substitute. To choose the corresponding spread adjustment, the language recommended by the ARRC contains another cascade: if the parties agree: adopt the concept of “early opt-in” and the lender chooses to exercise such an “early opt-in” (which, depending on the terms agreed by the parties, may or may not require the borrower`s agreement), the adjustment of the spread is determined and updated by reference to the indicative rates published at the time of the entry into force. each interest rate period, subject to the view described above, and applies during the period of that period until the applicable spread adjustment becomes static, as shown above, on that date, the static spread adjustment applies for the remaining duration of the transaction.