CDOR cessation: The CARR recommended fallback language for CDOR loans

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CDOR cessation: The CARR recommended fallback language for CDOR loans

CDOR cessation: The CARR recommended fallback language for CDOR loans

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September 15, 2022

On May 16, 2022, Refinitiv Benchmark Services Limited (RBSL), the benchmark administrator of the Canadian Dollar Offered Rate (CDOR), announced that the calculation and publication of all tenors of CDOR will permanently cease after June 28, 2024 (the CDOR Cessation Date). This announcement followed a period of significant public consultation by the Canadian Alternative Reference Rate working group (the CARR), which culminated in the publication of the CARR White Paper on December 16, 2021. The White Paper included several recommendations, including (i) that RBSL permanently discontinue the calculation and publication of CDOR and (ii) that market participants adopt the Canadian Overnight Repo Rate (CORRA) as a replacement rate for CDOR. As discussed below, this transition will also affect the bankers’ acceptance lending model typically employed in Canadian dollar credit facilities.

To encourage market participants to transition their credit facility documentation to CORRA, the CARR published recommended fallback language (the Recommended Language) for use in new and existing loan agreements in August 2022. Using the Recommended Language will ensure that credit agreements contain a robust benchmark rate following the future cessation of the publication of CDOR by RBSL by providing an automatic, hardwired transition to CORRA.

Recommended or required language?

The Recommended Language terms are only recommendations and may be voluntarily included in loan documentation that currently references CDOR. Parties may alter the terms to accommodate their needs and preferences, and market participants are not bound to these recommendations. There may also be changes made to the Recommended Language as the market evolves, and it is important for interested parties to monitor any updates should the language be adopted. Nevertheless, the cessation of the London Interbank Offered Rate (LIBOR) demonstrated the various legal, economic, and practical issues that can arise when fallback language is ambiguous or nonexistent. The adoption of the Recommended Language is one way to ensure that a credit agreement includes strong fallback language, saving time, money, and legal resources in the future.

The CORRA Replacement Language

The Recommended Language includes proposed hardwired fallback language, which can be inserted into credit agreements and modified as the context requires. The following is a high-level overview of some of the important features of the Recommended Language. Capitalized terms described below, which are not otherwise defined herein, are defined in the Recommended Language.

Feature	Description
Hardwired approach	Hardwired transition to CORRA automatically takes effect following trigger events as opposed to an “amendment approach,” which would require further amendments to the credit agreement following a trigger event.
Trigger mechanism	Automatic transition from CDOR to the Benchmark Replacement on the CDOR Cessation Date in June 2024.
Two-step waterfall to determine the rate to be used to replace CDOR	Step #1: Term CORRA + applicable credit spread adjustment (CSA) Step #2: CORRA Compounded in Arrears + applicable CSA Term CORRA is not yet available. It is expected to be published ahead of the CDOR Cessation Date, but there is no certainty that it will be available by then. If the fallback language is triggered before Term CORRA is available, the replacement rate pursuant to the waterfall would be CORRA compounded in-arrears (Daily Compounded CORRA). When Term CORRA is available, it will replace Daily Compounded CORRA.
No early opt-in	There is no early opt-in language ahead of the CDOR Cessation Date, but parties can choose to amend their agreements to opt-in early.
Moving away from bankers’ acceptances	Given the interconnectedness of bankers’ acceptances (BAs) with CDOR, the CARR has recommended moving away from the issuance of BAs. Any rollover or conversion requests of a loan to a BA would become ineffective. Any BA requests would be deemed a CORRA loan request, and all outstanding BAs would continue to maturity as is. Lenders are not required to cease the issuance of BAs.
Credit spread adjustments	Hardcoded CSAs are included, effective as of the date of the cessation announcement, and are meant to account for the economic difference between the replacement rate and CDOR. Parties can use their own CSAs if preferred.
Non-standard borrowing periods	The CARR does not recommend standard mechanics for non-standard borrowing periods. Parties must decide this based on their own needs. Parties should consider whether non-standard borrowing periods would be appropriate in the context of a term CORRA structure and, if so, also decide on pricing and how any CSA would be applied.

Takeaways

The CARR has drafted thorough, unambiguous language to help parties prepare for the cessation of CDOR. Although optional, it is strongly recommended by the CARR that parties adopt the Recommended Language and ensure they protect themselves from the challenges that may arise from inadequate fallback language later on. It is also important to note that these are general recommendations made by the CARR and that borrowers and lenders should determine and incorporate their own language based on their specific circumstances and needs.

For more information or advice with respect to the CDOR fallback language or the transition from CDOR to CORRA, contact Ryan Therrien or Jonathan Meyer.

Please note that the information provided in this article does not constitute legal or professional advice or a legal opinion of any kind. If you require any assistance regarding specific legal issues with respect to the transition from CDOR to CORRA or banking and finance law more generally, please contact a member of Dentons’ Banking and Finance group or other legal counsel.