On October 2, 2020, the US Loan Syndication and Trading Association (“LSTA”)[1] released for comment an exposure draft of LIBOR Replacement Provisions for Amendment of CLO Indenture and announced its intention to publish a final version in November. The LSTA stated that the purpose of the operative LIBOR replacement provisions and accompanying form of supplemental indenture is to provide a template for CLO investors and transaction parties to use in connection with a CLO transaction that does not already contain provisions to effect the transition or fallback from LIBOR to a non-LIBOR benchmark rate upon the occurrence of specified LIBOR transition events.
In connection with the release of the exposure draft, the LSTA noted that, according to data from Wells Fargo, over $150 billion of CLOs were issued or last refinanced or reset prior to 2018 (when the market started to react to the need to transition from LIBOR) and that while those CLOs may be subject to a refinancing or other opportunity to add an appropriate fallback, or be subject to the Alternative Reference Rates Committee’s proposed New York State legislative solution[2] if adopted, failing these or similar solutions, the transaction parties will need to amend the related CLO indentures to facilitate the transition and fallback to a replacement benchmark rate in order to avoid such indentures defaulting to a fixed rate with possible resulting value transfers.
The draft form of indenture supplement assumes that the consent of holders of each class of CLO securities would be required to adopt a replacement benchmark, and that the existing indenture language would result in a fallback to the last quoted LIBOR.
[1] The LSTA is a not-for-profit trade association that is made up of a broad and diverse membership involved in the origination, syndication, and trading of commercial loans. The over 500 members of the LSTA include commercial banks, investment banks, broker-dealers, hedge funds, mutual funds, insurance companies, fund managers, and other institutional lenders, as well as service providers and vendors. The LSTA undertakes a wide variety of activities to foster the development of policies and market practices designed to promote just and equitable marketplace principles and to encourage cooperation and coordination with firms facilitating transactions in loans. Since 1995, the LSTA has developed standardized practices, procedures, and documentation to enhance market efficiency, transparency, and certainty.
[2] We examined the proposed legislative solution in our related March 12, 2020, Perspective “US ARRC Proposes a New York State Legislative “Solution” for Legacy LIBOR Contracts Without Adequate Fallbacks—But What Does It Actually “Solve”?