On November 23, 2020, the Loan Market Association (the “LMA”) announced the publication of several new and revised documents, with the purpose of helping market participants incorporate appropriate transition mechanisms into their loan documentation.
1. New exposure draft multicurrency term and revolving facilities agreement incorporating rate switch provisions (lookback with observation shift) (“Rate Switch Agreement (Lookback with Observation Shift)”)
Previously, the LMA had only published such an agreement without observation shift. This publication follows the recognition of the lookback with observation shift mechanism as a “viable and robust alternative” by the Working Group on Sterling Risk-Free Reference Rates’ (the “Working Group”) in their recommendations of September 2020.
The key difference between the lookback with and without observation shift comes from the weighting of the daily risk-free rates in the formula, and how such weighting is used to address non-business days. These differences are documented in Schedules 16 (Daily Non-Cumulative Compounded RFR Rate) and 17 (Cumulative Compounded RFR Rate) of the Rate Switch Agreements.
The Rate Switch Agreement (Lookback with Observation Shift) is an exposure draft only, and so not a final recommended form of the LMA.
2. Revised exposure draft multicurrency term and revolving facilities agreement incorporating rate switch provisions (lookback without observation shift) (“Rate Switch Agreement (Lookback without Observation Shift)”)
The LMA has published a revised form of the Rate Switch Agreement (Lookback without Observation Shift) following initial market feedback. It remains an exposure draft only, and so not a final recommended form of the LMA.
3. Revised commentary relating to Rate Switch Agreements
The commentary relating to the Rate Switch Agreements has been updated to reflect the amendments to the Rate Switch Agreement (Lookback without Observation Shift), and the publication of the Rate Switch Agreement (Lookback with Observation Shift). The updates to the commentary include, among other things: (a) a note that the Rate Switch Agreements are identical, save for the calculation provisions therein; (b) a confirmation that the “Rate Switch Early Trigger Events” set out therein are intended to mirror the “Index Cessation Events” under the 2006 ISDA Definition (as amended by ISDA’s IBOR Fallbacks Supplement, to which see here); and (c) additional guidance on the determination of a Credit Adjustment Spread.
4. Term sheet for Rate Switch Facility Agreements
This newly published term sheet has been drafted in such a form as to be capable of use with either Rate Switch Facility Agreement.
5. RFR terms for use with supplement to revised replacement of screen rate language
Finally, the LMA has published RFR terms. These follow the LMA’s August 2020 “Note on the Revised Replacement of Screen Rate Clause and documentary recommendations published by the Working Group on Sterling Risk-Free Reference Rates”, which contained a supplement to the LMA’s Replacement of Screen Rate Clause that is designed to facilitate satisfaction of the Working Group’s April and July 2020 documentary recommendations. This supplement contained a placeholder for pre-agreed terms. These RFR terms are designed to be used in conjunction with the pre-agreed terms placeholder in the supplement to assist market participants in this regard.
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.