Where we left off: In our Mid-Year Check-In blogpost, we noted that progress in the development and readiness of some credit sensitive interest rate indices (e.g., Bloomberg’s BSBY, IBA’s Bank Yield Index and American Financial Exchange’s AMERIBOR) seemed to spark some urgency in the development of SOFR’s forward-looking term rate in Q2, including the ARRC’s selection of CME Group as administrator for Term SOFR, and the CFTC’s SOFR First Initiative to encourage primary market swaps dealers to quote USD swaps at SOFR. Those efforts culminated in the ARRC’s formal recommendation of Term SOFR for use in the bank loan market on July 29, 2021.
On July 22, 2021, Representative Brad Sherman introduced H.R. 4616, the “Adjustable Interest Rate (LIBOR) Act of 2021” (the “Bill”) into the U.S. House of Representatives. The Act is before the House’s Committee on Financial Services, Committee on Ways and Means, and Committee on Education and Labor. On July 29, 2021, the House’s Committee on Financial Services voted to advance the Bill, along with certain technical amendments proposed by Representative Sherman. The version of the Bill approved by the Committee on Financial Services can be accessed here: Adjustable Interest Rate (LIBOR) Act of 2021 (Committee on Financial Services Version). The Committee on Ways and Means, and Committee on Education and Labor have yet to act on the Bill.
The last few months have seen the pace of change accelerate in the business loan market’s transition away from LIBOR. Several alternatives to the replacement benchmark rate recommended by the Alternative Reference Rates Committee (ARRC), the Secured Overnight Financing Rate (SOFR), gained momentum in the business loan market in the first part of 2021, and the ARRC and some regulators responded with efforts to highlight why SOFR should be the benchmark of choice. Set forth below are some of the milestones from an already eventful year, as well as some open questions to be worked through in the second half of 2021.
On June 4, 2021, the Loan Market Association (LMA) published a recommended form of its reference rate selection agreement (the Selection Agreement), which has been updated following market feedback. The Selection Agreement has been updated to reflect the LMA’s suite of RFR-based documentation and rate switch agreements, and the conventions found in those documents.
On May 20, 2021, the UK Financial Conduct Authority (FCA) published a consultation on its proposed policy framework for exercising two of its new powers under the Benchmarks Regulation, as introduced by the UK Financial Services Act 2021 (UK BMR). These powers are designed to facilitate an orderly wind down of critical benchmarks such as LIBOR, and were discussed in more detail in our earlier blog post.
On May 6, the LSTA published its long-awaited concept Daily SOFR and risk-free rate (RFR)-based multicurrency credit agreements (the Concept RFR Documents). The publication of these documents is a welcomed step in the transition from LIBOR These Concept RFR Documents illustrate various types of SOFR-based US Dollar credit facilities and RFR-based multicurrency credit facilities which use a daily, in arrears benchmark and have been prepared by the LSTA as educational tools for market participants. Four Concept RFR Documents have been published.
- A Daily Simple SOFR referenced credit agreement for a USD term loan facility. This credit agreement also includes alternative provisions for the use of a daily compounded SOFR interest rate where interest is calculated and applied daily to outstanding principal and accrued interest.
- A Daily Compounded SOFR referenced credit agreement for a term loan facility denominated in USD. Interest is calculated daily using the “compound the rate” approach where the interest is calculated using a compounding formula set out in the credit agreement.
- A multicurrency IBOR/RFR referenced credit agreement for a revolving loan facility (with optional drafting for a term loan facility) based on a simple interest calculation. This multicurrency credit agreement allows for borrowings denominated in USD, Euro, Japanese Yen, Sterling, Swiss Franc. It also provides an example for offering RFR-referenced loans for USD, Sterling and Swiss Franc denominated loans, but with EURIBOR-referenced loans for Euros and TIBOR-referenced loans for Yen.
- A multicurrency IBOR/RFR referenced credit agreement which provides for daily simple RFR referenced loans denominated in Sterling and Swiss Francs and USD LIBOR-referenced loans for Dollars, EURIBOR-referenced loans for Euros and TIBOR-referenced loans for Yen. It contains a mechanism for automatically transitioning to a spread-adjusted daily simple RFR (SOFR) or term RFR (SOFR) upon the occurrence of certain trigger events.
These four Concept RFR Documents are available to LSTA subscribers on the LSTA Library for the LIBOR Transition. Market participants are encouraged to familiarize themselves with the Concept RFR Documents.
Please contact any of the authors of this briefing or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.
On March 24, 2021, the New York State legislature passed a Senate Bill (the Bill) regarding the discontinuation of USD LIBOR, which will cease in mid-2023. New York State Governor Andrew Cuomo signed the Bill into law on April 6, 2021.
On March 30, 2021, the LMA published its exposure draft RFR documentation as recommended forms, and updated the documentation to reflect, among other things, the Sterling Risk-free Rate Working Group’s (the Working Group) updated conventions. The LMA also replaced their single currency SONIA and SOFR exposure drafts with two recommended form single currency RFR facility agreements, and updated their RFR terms.
On March 25, 2021, the Alternative Reference Rates Committee (ARRC) released supplemental recommendations for its hardwired fallback language for US dollar denominated syndicated and bilateral loans. The ARRC’s supplemental recommendations follow the certainty on fallback timings and economics afforded by the March 5, 2021 announcements by ICE Benchmark Administration, the UK Financial Conduct Authority and ISDA regarding the cessation of LIBOR.
On March 26, 2021, the LMA published a note outlining considerations for market participants relating to the use of forward-looking term SONIA reference rates (Term SONIA Rates).
Term SONIA Rates have been available in beta form since July 2020, and available for use since 11 January 2021. Term SONIA Rates are expected to have limited use as the UK authorities have made clear their preference for the market to adopt a broad-based transition to SONIA compounded in arrears for new transactions, with use of Term SONIA Rates being more limited than the current use of LIBOR, and with SONIA compounded in arrears being seen by the Bank of England and FCA as the most robust and reliable replacement rate for LIBOR. However, it is acknowledged that Term SONIA Rates may provide an option for loan transition for some parts of the loan market.