The federal appropriations bill that passed the U.S. House and Senate in March 2022 included a provision that finally codified what will happen with contracts reliant on the London interbank offered rate, or LIBOR. The law finds that:

• LIBOR is used as a benchmark rate in more than $200,000,000,000,000 worth of contracts worldwide.
• A significant number of existing contracts that reference LIBOR do not provide for the use of a clearly defined or practicable replacement benchmark rate when LIBOR is discontinued.
• The cessation of LIBOR could result in disruptive litigation related to existing contracts that do not … clearly define … [a] replacement benchmark rate.

And it stipulates that, in general, on the LIBOR replacement date, all contracts that are not consumer loans and that use LIBOR as a reference rate—and do not provide either a specific fallback benchmark rate or a specific person responsible for determining the replacement rate—will switch from LIBOR to a benchmark selected by the Federal Reserve Board of Governors. That Fed-selected replacement rate is the secured overnight financing rate (SOFR) with respect to LIBOR contracts that are not consumer loans.

To understand what this means for corporate debt and other business contracts, Treasury & Risk spoke with Amy McDaniel Williams, a partner in the structured finance and securitization practice at law firm Hunton Andrews Kurth LLP who helps clients draft purchase agreements, bilateral credit agreements, and securitization contracts.

Treasury & Risk:  Thank you, Amy, for taking the time to speak with us. I assume that for new contracts, companies are selecting benchmark rates other than LIBOR.

Amy McDaniel Williams:  Yes. Across all the types of contracts I work on, companies are switching to alternative benchmarks—typically SOFR. The challenge has been figuring out what should happen with the legacy loans or credit agreements that still reference LIBOR.

T&R:  And companies have a year to figure this out, right?