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On June 21, 2022, the Loan Syndications and Trading Association (“LSTA”) released its final form documents for lenders amending loan agreements to convert the London Interbank Offered Rate (“LIBOR”) to the Term Secured Overnight Financing Rate (“SOFR”) to replace. . The LSTA forms contain templates for both broad, consensual amendments that give parties more flexibility to change existing terms of their loan agreements, and more narrowly tailored amendments to implement Term SOFR and related terms. A broad overview of the LSTA change process and the forms can be found here.
Borrowers can generally use the LSTA forms without raising significant tax concerns. However, tax practitioners should be careful to ensure that the terms of a particular change satisfy the provisions of the last section 1.1001-6 in order to avoid a chargeable event. Broadly under these rules, a change that is a “Covered Change” is not taxable under Section 1001. A Covered Change is any change that: (i) replaces a “Retired IBOR” rate (egLIBOR) with a “qualified interest rate” (eg, a SOFR-based or other qualified replacement interest rate); (ii) add a qualifying rate as a replacement rate to a contract whose operating rate uses a discontinued IBOR rate; or (iii) substitute a qualifying rate for a fallback rate using a discontinued IBOR rate. Covered Changes also include certain “Related Changes,” which may be technical, administrative, or operational changes that are “reasonably necessary” to implement a Covered Change, or incidental cash payments to accommodate small valuation differences from Related Changes. Our detailed summary of the final regulations can be found here.
To the extent that the Lending Parties attempt to use the Consensual Modification Form, tax practitioners should definitely review the modifications to confirm that each modification is a Covered Modification. The more narrowly tailored shapes are more likely to fall within the requirements of Section 1.1001-6. For example, the inclusion of a fallback clause is a covered amendment so long as each of the specified fallback rates is a qualifying rate, or if the fallback rate is indefinite, that rate nevertheless represents a remote contingency (for practical reasons, borrowers should generally assume that it is a remote contingency). But again, tax practitioners should review the specific provisions carefully to ensure that any change is a Covered Change.
The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.
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