On September 28, 2020, the Loan Syndication and Trading Association (“LSTA”)[1] exposed draft revisions to the LSTA form of Par/Near Par Loan Trade Confirmation Standard Terms and Conditions to facilitate the transition from LIBOR to SOFR (or other alternative risk-free rates (“RFRs”)) for the US syndicated loan market.  Once these revisions are finalized, comparable revisions will be made to the LSTA’s distressed documentation.

Since there is currently a mixture of loans in the market referencing LIBOR and SOFR (or another RFR), respectively, that may be traded, the LSTA has determined that its trading documentation should reflect that fact. As market participants know, the LSTA’s par/near trading documents include compensation for delayed settlement that is intended to cover the cost of carry for the seller. Therefore, it is important to identify the applicable interest rate to be used to calculate such delayed settlement compensation. The LSTA Board has determined that the appropriate treatment for a LIBOR-referencing loan is to apply the referenced LIBOR-based rate and, likewise, to apply the RFR-based rate for a RFR-referencing loan. For example, a SOFR-referencing loan would have cost of carry determined by a SOFR-based rate.

The draft revisions are intended to provide this treatment. However (and while relatively unlikely to occur), the draft revisions do not deal with the case where the reference rate changes during the applicable period for which delayed settlement compensation is payable.

After a three-week comment period, LSTA expects to finalize these proposed drafting changes and conform related trade confirmation documentation.

[1] The LSTA is a not-for-profit trade association that is made up of a broad and diverse membership involved in the origination, syndication, and trading of commercial loans. The over 500 members of the LSTA include commercial banks, investment banks, broker-dealers, hedge funds, mutual funds, insurance companies, fund managers, and other institutional lenders, as well as service providers and vendors. The LSTA undertakes a wide variety of activities to foster the development of policies and market practices designed to promote just and equitable marketplace principles and to encourage cooperation and coordination with firms facilitating transactions in loans. Since 1995, the LSTA has developed standardized practices, procedures, and documentation to enhance market efficiency, transparency, and certainty.