President Joe Biden last week signed a $1.5 trillion spending bill into law, which includes provisions on how to resolve disputes arising from the debt market’s transition away from LIBOR.
While most LIBOR-based CRE debt has fallback language in case the market standard, LIBOR, is phased out, some ‘tough’ LIBOR contracts are vague enough to warrant concern over disputes and even litigation. The bill will give clear instructions on how to adjust these tough contracts, and “create(s) a safe harbor from litigation for parties that are covered by the legislation and prevent otherwise inevitable litigation costs and gridlock,” according to a statement from CREFC.
The legislation will remove uncertainty for smaller CRE deals handled by regional banks and debt funds. Non-real estate debt not centered around New York law was more vulnerable to LIBOR’s complete cessation in June 2023.
“There were a lot of contracts that never assumed LIBOR would end,” said Raj Aidasani, senior director of research at CREFC. Of the $200 trillion in USD LIBOR CRE contracts, those that have no fallback benchmark or mitigating language are a small percentage, he said. “But still, we’re talking billions of dollars.”
However, while the bill should prevent an occasional hiccup, much of the concern was already addressed when New York State passed a similar law for LIBOR debt governed by New York State law, according to Aidasani.
“There was a bigger sigh of relief when the New York state legislation was passed because most of our contracts are governed under New York law,” said Aidasani, adding that was true of many other market participants.
“There are obviously other types of loans; consumer loans, specifically auto loans, student loans that are in mortgages or that have state by state regulations. We needed a federal fix that just covered everything. And the federal legislation is very similar to the New York state legislation,” Aidasani added.