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December 17, 2021 | News

As a result of the financial crisis in 2008, the U.S. and international banking regulators have expressed concern about London Interbank Offered Rate (“LIBOR”) due to a lack of a deep and liquid market in unsecured intra-bank transactions, reducing the reliability of LIBOR indexes. These regulators have stated that the market needs to transition to an alternative reference rate for floating rate transactions.

On March 5, 2021, LIBOR’s primary regulator, the United Kingdom’s Financial Conduct Authority (“UK FCA”), and the LIBOR administrator, ICE Benchmark Administration (“IBA”) formally announced that all LIBOR tenors will either be discontinued or declared non-representative as of June 30, 2023, with some being discontinued as early as December 31, 2021.

Unless a triggering event occurs requiring conversion to a replacement index, legacy LIBOR loans will continue to be indexed to LIBOR until their first interest reset date after June 30, 2023 pursuant to existing language included in American AgCredit loan documents. After that date, LIBOR indexed loans will transition to an alternative reference rate plus a spread adjustment. After December 31, 2021, American AgCredit will no longer enter into new contracts or renew existing contracts using a LIBOR index as a benchmark interest rate.

U.S. banking regulators (including the Farm Credit Administration) issued supervisory guidance encouraging banks to transition away from using LIBOR for new loans as soon as practicable and in any event by December 31, 2021, and the banking regulators stated the following:

With respect to new financial contracts entered into before December 31, 2021, the regulators instructed banks/associations to either utilize a reference rate other than LIBOR or have robust fallback language in their loan documents that include a clearly defined alternative reference rate after LIBOR’s discontinuation.

With respect to new contracts entered into after December 31, 2021, the regulators instructed banks/associations that they will consider new instruments indexed to LIBOR, as a safety and soundness issue and encouraged institutions to stop entering into new LIBOR based contracts by the end of 2021. The statement did include some exemptions for institutions for hedging and meeting obligations under legacy contracts.

SOFR AS A REPLACEMENT REFERENCE RATE

The Federal Reserve convened the Alternative Reference Rate Committee (“ARRC”), which has recommended the creation of an alternative called the Secured Overnight Financing Rate (“SOFR”) as a replacement benchmark rate. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and is completely transaction-based. The Federal Reserve Bank of New York began publishing SOFR trading data on April 3, 2018. American AgCredit will offer SOFR based products as of December 2021.

On July 29, 2021, ARRC announced that it is formally recommending CME Group’s forward-looking SOFR term rates (“SOFR Term Rates”) as replacements for LIBOR. This formal recommendation follows the

ARRC’s July 21 announcement of conventions and recommended best practices for the use of the SOFR Term Rates.

In conjunction with this development, the ARRC also released a factsheet outlining key steps leading to this point, SOFR’s strengths, and upcoming milestones. The factsheet provides an overview of why the ARRC believes SOFR is the best replacement for USD LIBOR, because SOFR is:

§ Deep, broad, and diverse enough that it does not dry up in times of market stress

§ Resilient even as markets evolve over time

§ Entirely transaction-based, so it cannot easily be manipulated

WHAT AMERICAN AGCREDIT IS DOING

As members of several industry-wide committees and regulatory advisory committees, American AgCredit and other Farm Credit institutions have been actively monitoring and participating in discussions with industry groups and financial regulators about the transition of LIBOR as a benchmark for floating rate transactions. American AgCredit continues to work with our borrowers to ensure they understand the implications of the index transition and that alternative reference rate products are available for our members. As of December 2021, American AgCredit will offer SOFR based products as an alternative to LIBOR based products.

Over the next 18 months, American AgCredit will be working on individual transition plans with customers who have an existing LIBOR based product.

Please contact your Relationship Manager to discuss the transition from LIBOR to SOFR based products, or alternatively they will contact you.

Definitions for terms used above:

“Available Tenor” shall mean, as of any date of determination and with respect to the then-current Benchmark, as applicable, (x) if the then-current Benchmark is a term rate, any tenor for such Benchmark that is or may be used for determining the length of an Interest Period or (y) otherwise, any payment period for interest calculated with reference to such Benchmark, as applicable, pursuant to this Agreement as of such date.

“Benchmark” shall mean, initially, the LIBOR Rate; provided, that, if a replacement of the LIBOR Rate (or any subsequent Benchmark) has occurred pursuant to Section 3.01(g), then “Benchmark” means the applicable Benchmark Replacement to the extent that such Benchmark Replacement has replaced such prior benchmark rate. Any reference to “Benchmark” shall include, as applicable, the published component used in the calculation thereof.

“Benchmark Replacement” shall mean, for any Available Tenor:

the first alternative set forth below that can be determined by the American AgCredit:

the sum of: (A) Term SOFR and (B) 0.11448% (11.448 basis points) for an Available Tenor of one-month’s duration, 0.26161% (26.161 basis points) for an Available Tenor of three-months’ duration, 0.42826% (42.826 basis points) for an Available Tenor of six-months’ duration, or

the sum of: (A) Daily Simple SOFR and (B) the spread adjustment selected or recommended by the Relevant Governmental Body for the replacement of the tenor of LIBOR with a SOFR-based rate having approximately the same length as the subject tenor; and

the sum of (i) the alternate benchmark rate and (ii) an adjustment (which may be a positive or negative value or zero), in each case, that has been selected by American AgCredit and the Borrower as the replacement for such Available Tenor of such Benchmark giving due consideration to any evolving or then-prevailing market convention, including any applicable recommendations made by the Relevant Governmental Body, for U.S. dollar-denominated syndicated credit facilities at such time;

provided, that, if the Benchmark Replacement as determined pursuant to clause (a) or (b) above would be less than the Floor, the Benchmark Replacement will be deemed to be the Floor for the purposes of the loan documents.

“Benchmark Transition Event” shall mean, with respect to any then-current Benchmark other than the LIBOR rate, the occurrence of a public statement or publication of information by or on behalf of the administrator of the then-current Benchmark, the regulatory supervisor for the administrator of such Benchmark, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, an insolvency official with jurisdiction over the administrator for such Benchmark, a resolution authority with jurisdiction over the administrator for such Benchmark or a court or an entity with similar insolvency or resolution authority over the administrator for such Benchmark, announcing or stating that (a) such administrator has ceased or will cease on a specified date to provide all Available Tenors of such Benchmark, permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide any Available Tenor of such Benchmark or (b) all Available Tenors of such Benchmark are or will no longer be representative of the underlying market and economic reality that such Benchmark is intended to measure and that representativeness will not be restored.

“Daily Simple SOFR” shall mean, for any day, SOFR, with the conventions for this rate (which will include a lookback) being established by American AgCredit in accordance with the conventions for this rate recommended by the Relevant Governmental Body for determining “Daily Simple SOFR” for syndicated business loans; provided, that, if American AgCredit decides that any such convention is not administratively feasible for American AgCredit, then American AgCredit may establish another convention in its reasonable discretion.

“Early Opt-in Effective Date” shall mean, with respect to any Early Opt-in Election, the sixth (6th) Business Day after the date notice of such Early Opt-in Election is provided to the Lenders and the Company, so long as the Administrative Agent has not received, by 5:00 p.m. (New York City time) on the fifth (5th) Business Day after the date notice of such Early Opt-in Election is provided to the Lenders and the Company, written notice of objection to such Early Opt-in Election from either Lenders comprising the Required Lenders.

“Early Opt-in Election” shall mean, the occurrence of:

  1. a notification by the Administrative Agent to (or the request by the Borrowers to the Administrative Agent to notify) each of the other parties hereto that at least fifty (50) currently outstanding U.S. dollar-denominated syndicated credit facilities at such time contain (as a result of the amendment or as originally executed) a SOFR-based rate (including SOFR, a term SOFR or any other rate based upon SOFR) as a benchmark rate (and such syndicated credit facilities are identified in such notice and are publicly available for review), and
  2. the joint election by the Administrative Agent and the Borrowers to trigger a fallback from the LIBOR Rate and the provision by the Administrative Agent of written notice of such election to the Lenders.

“Floor” shall mean the benchmark rate floor if any, provided in this Agreement initially (as of the execution of this Agreement, the modification, amendment, or renewal of this Agreement or otherwise) with respect to the LIBOR Rate.

“Relevant Governmental Body” shall mean the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of New York, or a committee officially endorsed or convened by the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of New York, or any successor thereto.

“SOFR” shall mean a rate per annum equal to the secured overnight financing rate for such Business Day published by the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate) on the website of the Federal Reserve Bank of New York, currently at http://www.newyorkfed.org (or any successor source for the secured overnight financing rate identified as such by the administrator of the secured overnight financing rate from time to time).

“Term SOFR” shall mean, for the applicable corresponding tenor, the forward-looking term rate based on SOFR that has been selected or recommended by the Relevant Governmental Body.

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