Last week, the New York State Legislature passed legislation1 that is expected to facilitate the transition from LIBOR of any contract, security or instrument that (i) is governed by New York law, (ii) uses USD LIBOR in making any calculation or determination, and (iii) either does not include a LIBOR fallback provision or contains fallback provisions that would result in a LIBOR-based rate.2
The legislation seeks to encourage broad adoption of the ARRC-recommended benchmark replacement (i.e., a SOFR-based benchmark plus the recommended spread adjustment), as well as to minimize legal uncertainty and litigation risk, by addressing the consequences of USD LIBOR cessation for these so-called “tough legacy” contracts.
If signed into law,3 the legislation will amend the New York General Obligations Law, with immediate effect, to replace USD LIBOR in these contracts, “by operation of law,” with the SOFR-based benchmark replacement, with such replacement occurring on the date that USD LIBOR permanently ceases to be published or the date of any public announcement by the relevant recommending body4 that USD LIBOR is no longer representative.5
In addition, the legislation anticipates and seeks to preempt potential disputes arising from use of the recommended SOFR-based benchmark by:
- Providing that the SOFR-based benchmark is a “commercially reasonable replacement” for, and a “commercially substantial equivalent” to, USD LIBOR;
- Confirming that neither the discontinuation of USD LIBOR nor the transition to the SOFR-based benchmark will impair a party's right to receive payment under such contract, excuse a party from performing its obligations thereunder (e.g., based on any force majeure clause or otherwise), constitute a breach of contract, or give a party any right to terminate or nullify the contract; and
- Granting a safe harbor from litigation for the use of the recommended benchmark replacement.
The legislation permits parties to:
- Exercise discretion in adopting any administrative or operational modifications reasonably necessary to the implementation of the recommended SOFR-based benchmark; or
- Mutually opt out of the application of the legislation at any time or select an alternative (non-LIBOR-based) benchmark replacement. (The legislation would not override any contract in which the parties have expressly agreed to fall back to a non-LIBOR based rate.)
The passage of the legislation is timely, coming just days after the ARRC published a report estimating that $1.9 trillion in USD LIBOR-based bonds and securitizations will remain outstanding beyond the target end date (June 2023), and that many of these contracts “may have no effective means to transition away from LIBOR upon its cessation.”
Although the legislation is expected to provide substantial clarity as parties transition away from USD LIBOR, concerns remain that it will not be sufficient to prevent a spate of litigation. One such concern is a potential conflict with the unanimous consent requirements of the Trust Indenture Act (“TIA”), which provides that the rights of holders of certain securities to receive payments of interest must not be “impaired or affected” without their consent.6 Another potential hurdle will be achieving consistency in the treatment of tough legacy contracts governed by other states' laws.
Support has been growing for companion federal legislation to address these issues, with both Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen recently endorsing such a bill. While no such federal legislation has been formally introduced in Congress, the New York legislation may add momentum to these efforts.
Footnotes
1 See NY State Senate Bill S297B (available here) and NY State Assembly Bill A164B (available here). The bills are based on a legislative proposal of the Alternative Reference Rates Committee (“ARRC”).
2 The ARRC has warned that, absent legislation, the economics of these contracts would be “dramatically change[d]” upon USD LIBOR cessation, triggering widespread litigation.
3 Governor Cuomo is expected to sign the legislation, which was included in his budget proposal for FY 2021–2022.
4 The “relevant recommending body” is defined as the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC (or any successor to any of them).
5 The legislation overrides any existing USD LIBOR-based fallback language in a contract (in favor of the SOFR-based benchmark) and nullifies any existing fallback language to the extent it requires polling for USD LIBOR or any other interbank lending rates.
6 See Section 316(b) of TIA.
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