If you’re reading this, you already have a sneaking suspicion that there is a lot of work to do between today and the day LIBOR finally goes dark. As discussed in Part 1 and Part 2, the potential consequences are substantial and wide-ranging, but luckily there are also many options during this transitional period.
As you might have guessed, one of those options is ContraxSuite. With ContraxSuite, you have your own personal Sherlock Holmes, pre-trained to read contracts and “speak financial”. Our contract analytics software can read and categorize contracts, sniff out potentially affected clauses, and even identify and insert proposed amendments on its own. How does ContraxSuite do this? It looks for clues.
The Science of Deduction
Now that we know to start by sniffing around floating-rate agreements, not fixed-rate ones, it’s time to look for other, harder-to-find clues to identify documents indexed to LIBOR.
There are many standard definitions and terms of art that prominently appear in agreements. In credit agreements like syndicated loans – the kinds of agreements most commonly indexed to LIBOR – we know that terms like “interest rate,” “lender,” and “revolving commitment” are going to appear frequently. We also know that some other terms, like “lessor,” “three-axle trailer,” or “locational marginal pricing” are much less likely to appear.
These are the sorts of clues that ContraxSuite, your own personal Sherlock Holmes, can start to follow as you look to solve your LIBOR-related case. We have trained ContraxSuite on specific language that is likely to appear in both credit agreements generally, and LIBOR-indexed agreements specifically.
Spotting The Clues
Example 1: Base Rates
One of the most probable markers of a LIBOR-indexed agreement is the prominence of the term “Base Rate”. “Base rate” is related to the benchmark rate that is used in floating-rate credit agreements. Typically, the “actual” effective rate used to calculate interest payments is calculated by adding a spread or margin on top of the base rate (frequently, LIBOR). This is where the “base” in “base rate” comes from. The common use of the phrase “base rate” makes it ideal for targeted search:
Sometimes, the base rate in a document is tied to non-LIBOR rates. Sometimes, the phrase “base rate” doesn’t appear outside of a definitions section like the one above. Other times, the benchmark and margin rates appear only as numbers in a table, like this:
ContraxSuite can read tables, too, so even though a search for “base rate” won’t often be dispositive, it still gives us a clue as to what is going on in a loan agreement. The reason ContraxSuite can find all this information is because we are training it on a huge amount of data extracted by LexNLP from the OpenEDGAR system. Our sample of credit agreements numbers in the tens of thousands, across a span of over 30 years, and provides us with information about the regular and irregular clauses that may be present in your real agreements. Credit agreements found in the EDGAR database, or elsewhere, may vary a great deal one from the next, but even variation itself has patterns to it, and there are only so many ways to outline and portray the kinds of floating-rate calculations characteristic of LIBOR-indexed loans.
Example 2: Fallback Provisions
If your organization has already begun strategic discussions about LIBOR, you may be aware of the focus on fallback provisions. Fallback provisions, unlike simple definitions, can be trickier to find than a simple phrase like “base rate”. In many cases, these fallback conditions and processes are outlined within definitions like base rate. In other cases, however, the fallback provisions may be embedded inside other provisions, far away from the definition of base rate. Furthermore, some credit agreements have multiple fallback provisions that must be interpreted together, and in context.
Fallbacks are incredibly important. If your agreements don’t have fallbacks, you might face serious economic or legal effects. Even when fallback provisions are present, they may be intended only for extraordinary or rare occasions, not for business as usual in a world without LIBOR. Our work has helped us identify and classify fallback provisions – from administrative agent discretion, to common structures like “the greatest of a) …” and everything in between. Finding the fallbacks in a loan agreement is critical, and ContraxSuite can help.
Put ContraxSuite On The Case
In response to the growing need for LIBOR-related contract analytics, we are building a LIBOR-focused version of ContraxSuite. Trained on tens of thousands of financial contracts, ContraxSuite can find and label important LIBOR-related clauses, including fallback provisions. Contact us to find out more about how we can help your organization navigate the LIBOR transition (or scroll to the contact form at the bottom of this page). Click here for Part 1 of this series. Click here for Part 2. Continue to Part 4. Jump to Part 5.
LexPredict is an enterprise legal technology and consulting firm, part of the Elevate family of businesses. Our consulting teams specialize in legal analytics, legal data science and training, risk management, and legal data strategy consulting. We work with corporate legal departments and law firms to empower better organizational decision-making by improving processes, technology, and the ways people interact with both. We develop software and data tools, including ContraxSuite, LexSemble, CounselTracker, and LexReserve, that assist organizations with contract analytics and workflows, early case assessment and decision trees, outside counsel spend management, and case valuation. Discover more at lexpredict.com.