Syndicated and Bilateral Loans

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.

Continue Reading The LSTA Proposes Changes to Trading Documents for LIBOR Transition

During an economic downtown, LIBOR (and the interest rate on a LIBOR-priced loan) would likely increase.  Because SOFR is a rate based on transactions secured by U.S. Treasury obligations, it’s possible that during an economic downtown SOFR (and the interest rate on a SOFR-priced loan) would not increase and would in fact decline.  Thus, in times of economic stress, a bank’s income from its SOFR-priced loans would decline, while its funding costs would increase.

Continue Reading A Credit-Sensitive Supplement to SOFR: Borrowers’ Objections

On August 7, 2020, the Alternative Reference Rate Committee of the U.S. Federal Reserve (the “ARRC”) released a three-part “SOFR Starter Kit.” The first two parts[1] provide a history of the events that led to the replacement of the London Inter Bank Offered Rate (“LIBOR”), the choice of the Secured Overnight Financing Rate (“SOFR”) as its replacement for U.S. dollar LIBOR-based financial contracts, and how SOFR compares with LIBOR.

It is part three that brings together the numerous resources that the ARRC has published to implement its key recommendations, including links to its Best Practices (revised on September 7 to anticipate the imminent release of ISDA’s IBOR Fallback Protocol), syndicated loan conventions[2], refreshed recommended business loans fallback language[3], and an internal systems transition guide.


Continue Reading SOFR Starter Kit Tools That Should Be Adopted Immediately

The Benchmark Regulation (“BMR”) came into force in 2016 and applies since 1 January 2018. It aims to regulate benchmarks, including interest rate benchmarks such as London Interbank Offered Rate (“LIBOR”), used in the EU in order to make such benchmarks more reliable. For this purpose, the Benchmark Regulation introduced licensing and registration requirements but also obligations for users of benchmarks to deal with, and provide for plans in case of, interruptions or cessations of benchmarks. The BMR, however, does not give supervising authorities the right to directly amend financial instruments or contracts if the parties to it are unable to replace a benchmark for whatever reason. So any of these plans are subject to civil law requirements and restrictions applicable to a financial instrument or contract under its governing law.

Continue Reading Proposal for a Governmental IBOR Transition in the European Union

Borrowers and administrative agents in the syndicated loan markets continue to negotiate and fine-tune various fallback provisions related to LIBOR transition. Although pricing had traditionally been considered a “sacred right” requiring all lender approval, one of the most ubiquitous aspects to these LIBOR-transition-related fallback provisions is limiting or removing syndicate members’ consent rights to the replacement rate in the name of easing the logistics of such a massive overhaul. In fact, both the “Amendment Approach” and the “Hardwired Approach” recommended by the Alternative Reference Rates Committee (“ARRC”) have moved away from an all-lender standard. Although moving to a lesser standard should ease the pain of transition, prudent syndicate members will review these fallbacks with caution. Below is a list of LIBOR-transition-related issues that syndicate members should consider before making a commitment to lend.

Continue Reading Three LIBOR Transition Considerations for Syndicate Lenders

The People’s Bank of China (“PBOC”) released a white paper on August 31, expressing its intention to adopt the Depository-Institutions Repo Rate (“DR”) as the alternative substitute rate in the Chinese banking market. Several pricing indicators were used in Chinese banking market, including Repo Rate (“R”), DR, Fixing Repo Rate (“FR”), General Collateral Repo Rate (“GC”), Loan Prime Rate (“LPR”), China Interbank Offered Rate (“CHIBOR”) and Shanghai Interbank Offered Rate (“SHIBOR”). The white paper discusses the possibility of these indicators as alternative substitute rate and concludes that amongst these, DR has become the most important indicator amongst such rates in the PRC lending market. According to the white paper, DR is the indicator which best reflects the liquidity condition and financing interest rates in the banking system, and is already widely accepted by the market.

Continue Reading Depository-Institutions Repo Rate – China’s Response to LIBOR Transition

The LMA’S Latest Tools

On 11 September 2020, the LMA added to their complement of exposure drafts by publishing a draft multicurrency term and revolving facilities agreement incorporating rate switch provisions (the “Switch FA”).  This came on the heels of a note issued by the LMA[1] setting out optional supplementary language (the “LMA Supplement”) to be added to its existing Revised Replacement of Screen Rate Clause.

Why Is The LMA Producing These Documents Now?

The LMA has augmented its Revised Replacement of Screen Rate Clause before, but the Switch FA and the LMA Supplement were drafted in response to specific statements made by the Working Group on Sterling Risk-Free Reference Rates (“RFRWG”).  Those statements[2] (the “RFRWG Statements”) made it clear that the February 2020 form of Revised Replacement of Screen Rate Clause[3] would not satisfy the RFRWG’s objective that after the end of Q3 2020, sterling LIBOR referencing loan products should include a contractual mechanism for conversion to a suitable SONIA-based, or other alternative risk-free, rate (“RFR”).  These latest documents from the LMA are the most recent salvo in their ongoing efforts to facilitate the transition of the loan market away from LIBOR to alternative RFRs.


Continue Reading Documenting LIBOR Transition in the Loan Markets: The LMA Offers New Solutions, But Others Likely Will Follow