In a joint letter to the leadership of the House Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, the Association for Financial Professionals, joined by the National Association of Corporate Treasurers, and the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness laid out their argument in support of legislation that would provide a benchmark replacement rate for contracts that currently reference the London Interbank Offered Rate (Libor).
“Given the challenges facing NFCs as they navigate the Libor transition, it is important to minimize the legal uncertainty and adverse economic impacts to NFCs in the event that a contract does not contain fallback provisions for a Libor replacement rate,” the letter stated.
The letter went on to explain that the Secured Overnight Financing Rate (SOFR) has been identified by the Alternative Reference Rates Committee (ARRC), of which each signatory is a member, as the rate that represents the best practice for use in loans, certain new U.S. dollar derivatives, and other financial contracts. However, many nonfinancial corporates (NFC) are struggling to obtain from their lenders specific proposals and processes for how their loan agreements will be amended and the mechanics of how the ARRC’s recommended SOFR rate will substitute for Libor. Many banks are not yet offering SOFR-based loans even to large, well-capitalized NFCs, and NFCs are unable to negotiate current access to SOFR borrowings, even with large multi-year credit agreements nearing renewal.
“We are concerned that by the time the banks have fully prepared transition materials and processes, the NFCs awaiting that information would have little to no time to rework contracts, even with the extension provided by the FCA. It will be especially difficult for small- to medium-sized Main Street companies with smaller staffing to handle these complex issues while continuing to focus on their day-to-day business operations and recovery from the effects of COVID-19,” the letter stated.
Also of concern are financings where NFCs have limited contact with the counterparties, unlike their traditional relationship with bank lenders, such as term loans, floating rate notes, and asset securitizations.
The letter ended with a call for consideration of how the subcommittee’s oversight of financial market regulation, as well as possible federal legislation, could help to resolve affected legacy contracts following the cessation of Libor rate publication and to ensure conformity with the Trust Indenture Act of 1939.
Similar letters were also sent to Jerome Powell, chairman of the Federal Reserve; Treasury Secretary Janet Yellen; and Gary Gensler, chairman of the U.S. Securities and Exchange Commission.
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