As we discussed in an article a couple of months ago, LIBOR (the London Inter-Bank Offered Rate), an interest rate benchmark that is used as a reference rate for a wide range of financial transactions, will cease to be published in the near future. A major concern in the capital market and securitization industries has been addressing the difficult problem of how to fairly compensate investors in when a contracted LIBOR rate ceases to be available and no agreement on a new rate has been implemented.
In order to address this issue, on March 24, the New York State Assembly and Senate passed Assembly Bill 164, which adds a new Section 18-C to the General Obligations Law dealing with LIBOR replacement. The bill is awaiting transmission to the governor for his signature. The full text of this Bill is available at nysenate.gov. Capitalized terms in the summary below are used as defined in the Bill.
Pursuant to the new legislation, on the LIBOR Replacement Date, the Recommended Benchmark Replacement (essentially a replacement based on the secured overnight financing rate published by the Federal Reserve Bank of New York) will, by operation of law, be the Benchmark Replacement for any contract that uses LIBOR as a Benchmark and either contains no Fallback Provisions or contains Fallback Provisions that result in a Benchmark Replacement, other than a Recommended Benchmark Replacement, that is based in any way on any LIBOR value. In addition, following the occurrence of a LIBOR Discontinuance Event, any Fall Back Provisions in a contract that provide for a Benchmark Replacement based on or otherwise involving a poll, survey or inquiries for quotes or information concerning interbank lending rates or any interest rate or dividend rate based on LIBOR will be disregarded as if not included in such contract and will be deemed null and void and without any force or effect.
Determining Persons under a contract are granted the authority, but are not required, to select on or after the occurrence of a LIBOR Discontinuance Event the Recommended Benchmark Replacement as the Benchmark Replacement. Such selection of the Recommended Benchmark Replacement will be: (i) irrevocable; (ii) made by the earlier of either the LIBOR Replacement Date, or the latest date for selecting a Benchmark Replacement according to such contract; and (iii) used in any determinations of the Benchmark under or with respect to such contract occurring on and after the LIBOR Replacement Date.
The legislation includes a number of safe harbor provisions. First, it provides that the selection or use of a Recommended Benchmark Replacement as a Benchmark Replacement under or in respect of a contract by operation of the statute constitutes (i) a commercially reasonable replacement for and a commercially substantial equivalent to LIBOR; (ii) a reasonable, comparable or analogous term for LIBOR under or in respect of such contract; (iii) a replacement that is based on a methodology or information that is similar or comparable to LIBOR; and (iv) substantial performance by any person of any right or obligation relating to or based on LIBOR under or in respect of a contract.
Second, none of (i) a LIBOR Discontinuance Event or a LIBOR Replacement Date, (ii) the selection or use of a Recommended Benchmark Replacement as a Benchmark Replacement; or (iii) the determination, implementation or performance of Benchmark Replacement Conforming Changes, in each case, by operation of the statute, will: (a) be deemed to impair or affect the right of any person to receive a payment, or affect the amount or timing of such payment, under any contract; or (b) have the effect of (x) discharging or excusing performance under any contract for any reason, claim or defense, including, but not limited to, any force majeure or other provision in any contract; (b) giving any person the right to unilaterally terminate or suspend performance under any contract; (c) constituting a breach of a contract; or (d) voiding or nullifying any contract.
In addition, no person will have any liability for damages to any person or be subject to any claim or request for equitable relief arising out of or related to the selection or use of a Recommended Benchmark Replacement or the determination, implementation or performance of Benchmark Replacement Conforming Changes, in each case, by operation of the statute, and such selection or use of the Recommended Benchmark Replacement or such determination implementation or performance of Benchmark Replacement Conforming Changes shall not give rise to any claim or cause of action by any person in law or in equity.
Finally, the selection or use of a Recommended Benchmark Replacement or the determination, implementation, or performance of Benchmark Replacement Conforming Changes, by operation of the statute, shall be not deemed to (i) be an amendment or modification of any contract, or (ii) prejudice, impair or affect any person’s rights, interests or obligations under or in respect of any contract.
This legislation is intended to target securitizations, mortgages and other long-term, legacy floating-rate products which were issued before the announcement of LIBOIR’s cessation where the relevant documents include no workable fallback language. The Fed-backed Alternative Reference Rates Committee working group and The Securities Industry and Financial Markets Association, an ARRC member, issued statements of support for the legislation Thursday.
David Paseltiner is chair of the firm’s corporate and commercial transactions practice group and a member of its banking and financial services practice group. He represents businesses in a wide variety of industries, ranging in size from small start-ups to well established firms with national and international operations. He also represents individuals in connection with employment agreements, shareholders agreements and operating agreements. David can be reached at 516-393-8223 or dpaseltiner@jaspanllp.com.