ARTICLE
19 August 2022

‘Covered Modifications' And LSTA's New SOFR Amendment Forms

CW
Cadwalader, Wickersham & Taft LLP

Contributor

Cadwalader, established in 1792, serves a diverse client base, including many of the world's leading financial institutions, funds and corporations. With offices in the United States and Europe, Cadwalader offers legal representation in antitrust, banking, corporate finance, corporate governance, executive compensation, financial restructuring, intellectual property, litigation, mergers and acquisitions, private equity, private wealth, real estate, regulation, securitization, structured finance, tax and white collar defense.
Loan parties can use the LSTA forms generally without raising significant tax concerns.
United States Finance and Banking

On June 21, 2022, the Loan Syndications and Trading Association ("LSTA") published its final form documents for loan parties amending credit agreements to replace London Interbank Offered Rate ("LIBOR") with Term Secured Overnight Financing Rate ("SOFR"). The LSTA forms include templates for both broad-ranging, consensual amendments, which give the parties greater latitude to change existing terms to their credit agreements, as well as more narrowly tailored amendments designed to implement Term SOFR and related terms. A broad overview of the LSTA amendment process and forms can be found here.

Loan parties can use the LSTA forms generally without raising significant tax concerns. However, tax practitioners should pay careful attention that the terms of a specific amendment satisfy the final section 1.1001-6 regulations in order to avoid a taxable event. Very generally, under these regulations, an amendment that is a "covered modification" is not taxable under section 1001. A covered modification is any modification that: (i) replaces a "discontinued IBOR" rate (e.g., LIBOR) with a "qualified rate" (e.g., a SOFR-based or other qualified replacement rate); (ii) adds a qualified rate as a fallback rate to a contract whose operative rate uses a discontinued IBOR rate; or (iii) replaces a fallback rate that uses a discontinued IBOR rate with a qualified rate. Covered modifications also include certain "associated modifications," which can be technical, administrative or operational modifications "reasonably necessary" to implement a covered modification, or incidental cash payments to compensate for small valuation differences from associated modifications. Our detailed summary of the final regulations can be found here.

To the extent the loan parties seek to use the consensual amendment form, tax practitioners should certainly scrutinize the amendments to confirm that each modification is a covered modification. The more narrowly tailored forms fall more readily within the section 1.1001-6 regulations. For example, the inclusion of a fallback provision is a covered modification as long as each of the specified fallback rates constitutes a qualified rate, or if the fallback rate is indeterminate, such rate is nevertheless a remote contingency (as a practical matter, loan parties generally assume the possibility of Term SOFR being discontinued as being a remote contingency). But here too, tax practitioners should carefully review the specific provisions to ensure that each modification is a covered modification.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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