Leveraged Finance Market Updates – LIBOR and Leveraged Lending Regulatory Guidelines

LIBOR Update:

A follow-up to our client alert “The Transition from LIBOR and the Syndicated Loan Market’s Initial Reaction” dated September 12, 2017:

An increasingly common approach in the syndicated leveraged loan market to address the LIBOR issue is for the Borrower and Administrative Agent to set the rate giving due consideration to the then prevailing market convention for determining rates of interest, with a negative consent right for the lenders if the requisite lenders object. There has been some pushback recently in the TLB market from CLO’s who want to add language making it clear that any LIBOR amendments will in no event include a reduction of the applicable rate.

The education and fallback process is proceeding at a steady clip as well. For example, the Alternative Reference Rates Committee (“ARRC”) is studying streamlined replacement mechanisms for loan documentation and holding a roundtable at the Federal Reserve of New York on November 2, 2017 that is open to the public.

Leveraged Lending Regulatory Guidelines Update:

On October 19, 2017, the U.S. Government Accountability Office (“GAO”), the investigative arm of Congress, issued an opinion that the Leveraged Lending Guidance (“LLG”), created by the OCC, the Federal Reserve Board and the FDIC in 2013, is not “guidance” but rather a “rule” which should have been submitted to Congress for review per the Congressional Rule Act of 1996.

While it is unclear what the full implications of the GAO opinion will be, it now appears more likely that the regulatory burden on banks for leveraged lending will decrease. Next, the GAO will meet with the Senate Parliamentarian to come to a final ruling, which will begin the process of having the LLG submitted to Congress for approval. Congress will have the ability to change or reject rules within the LLG.