Cadwalader attorneys reviewed recently proposed regulations confirming that transitions from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates ("IBORs") to alternative reference rates in debt instruments and derivatives will not be taxable events.
According to the attorneys, the highly anticipated guidance clarifies countless instruments that must be amended to provide for new reference rates prior to the phasing out of IBORs.
Under the proposed regulations, the modification of an instrument to replace an IBOR-based rate with a Secured Overnight Financing Rate-based or other qualified replacement rate will not be treated as a "modification" for U.S. tax purposes and, thus, will not give rise to a taxable event, if (i) the fair market value of the modified instrument is substantially equivalent to the fair market value of the unmodified instrument and (ii) the replacement rate is based on transactions conducted in the same currency as the IBOR-based rate or is otherwise reasonably expected to measure contemporaneous variations in the cost of newly borrowed funds in the same currency as the IBOR-based rate.
This memorandum was published in Cadwalader's BrassTax newsletter.
The IRS proposed amending certain tax income regulations to provide guidance on the transition from interbank offered rates to other reference rates for debt instruments and non-debt contracts.
Cadwalader attorneys analyzed a Bank of England discussion paper on exposure related to collateral referencing LIBOR.
At the 2019 CREFC Annual Conference, Cadwalader Partner David Burkholder debated (i) key differences between LIBOR and SOFR, (ii) issues involved with developing a term SOFR rate and (iii) operational challenges presented by the transition.
Cadwalader's LIBOR Preparedness Team made available its LIBOR Topic Page. The free resource offers guidance on the sunset of LIBOR and the design of indices to replace it.