March 17, 2022
On Tuesday, March 15, 2022, President Biden signed the Consolidated Appropriations Act of 2022. Tucked into the 2,700 page bill was the Adjustable Interest Rate (LIBOR) Act, which contains legislation to help companies and lenders switch applicable financial contracts to a new reference rate away from the London Interbank Offered Rate (LIBOR). The legislation targets the estimated $15 trillion dollars’ worth of existing “tough legacy” LIBOR contracts expected to expire by June 30, 2023. A tough legacy contract is a contract that does not: (a) specify a replacement for LIBOR or (b) contain an adequate LIBOR replacement mechanism. In an attempt to avoid future litigation and provide a clear and uniform process for replacing these rates, the newly enacted legislation authorizes the Board of Governors of the Federal Reserve System to select a Secured Overnight Financing Rate (SOFR)-based replacement for LIBOR in tough legacy contracts. LIBOR-based contracts with no stipulation for a new benchmark rate will default to the Federal Reserve’s recommended SOFR, however, LIBOR-based contracts that contain provisions that allow them to easily transition to an agreed-upon alternative interest rate will not be affected.
In addition, the legislation also creates a “safe harbor” for eligible persons who select a SOFR-based LIBOR replacement. This “safe harbor” precludes eligible persons from being subject to legal liability arising out of their selection of a SOFR-based replacement rate. Businesses and lenders can switch tough legacy contracts to SOFR once the Federal Reserve has selected the applicable rule, which it is required to do within six months of the bill’s enactment. This law is designed to provide a federal solution to LIBOR transition for legacy contracts, supersedes state legislation regarding the selection of benchmark replacements, and reduces the likelihood of future litigation.