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IRS Releases Rev. Proc. 2020-44: The LIBOR Phase-Out Takes a Pleasant Arc IRS Releases Rev. Proc. 2020-44: The LIBOR Phase-Out Takes a Pleasant Arc

IRS Releases Rev. Proc. 2020-44: The LIBOR Phase-Out Takes a Pleasant Arc

The Financial Conduct Authority, the United Kingdom regulator with the responsibility for overseeing LIBOR, announced in the summer of 2017 that LIBOR would be phased out after the end of 2021. Since then, market participants and their respective advisors have warned that the cessation of LIBOR should be a focal point for the entire market. As a consequence, the Alternative Reference Rate Committee ("ARRC") and now the International Swaps and Derivatives Association ("ISDA") provided proposed "fallback" protocols for adoption of an alternative rate to LIBOR to facilitate a smooth transition away from LIBOR. However, concern persisted that the change in the interest rate in the applicable contract would cause a reissuance of the instrument thus constituting a discharge of the existing contract and the effectiveness of a new contract. In addition to the effect on bond issues, the concern would also effect interest rate swaps and other derivatives. The IRS provided initial proposed guidance on the issue in October 2019. Who knew at that time what 2020 would bring?  Industry groups persisted to bring awareness to the potential impact on the capital markets so that almost exactly one year following the prior proposed Treasury Regulation provisions, the IRS released Rev. Proc. 2020-44. The new Revenue Procedure applies to modifications to contracts entered on or after October 9, 2020 and before January 1, 2023. In addition, the Revenue Procedure can be relied upon retroactively for modifications to contracts occurring before October 9, 2020.

Rev. Proc. 2020-44 greatly simplifies the prior proposed regulations by providing that any modification to a contract that references an Interbank Offering Rate that is done to incorporate an “ISDA Fallback,” an “ARRC Fallback” or either fallback with certain reasonably necessary deviations will not result in a reissuance for tax purposes. A reissuance could potentially result in unintended adverse tax consequences. Borrowers and issuers should be aware the Revenue Procedure favors a replacement of LIBOR with the Secured Overnight Funding Rate (“SOFR”) plus adjustments for an applicable spread upon a cessation of LIBOR. As a result, contract participants should be sensitive to the use of rates other than SOFR (such as a prime rate) and the implication additional changes falling outside the safe harbor of Rev. Proc. 2020-44 may have on the obligation, either upon amendment of existing debt and derivative contracts or when entering into new agreements. Rev. Proc. 2020-44 does not eliminate the need for conduit issuer involvement on certain obligations so contract participants should additionally consider with counsel the timing and procedures necessary to obtain conduit issuer approval as applicable.

For more information about the LIBOR phase-out and the new Revenue Procedure, please contact Susan Price, Tyler Kalachnik, David Nie or any of the Ice Miller Public Finance lawyers with whom you regularly consult.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. It speaks only to guidance available as of October 6, 2020. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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