The LMA publishes exposure drafts of compounded risk-free rate facility agreements for sterling and US dollars23 September 2019
The LMA is pleased to announce the publication of exposure drafts of: (i) a compounded SONIA based sterling term and revolving facilities agreement; and (ii) a compounded SOFR based dollar term and revolving facilities agreement (the "Exposure Drafts"). SONIA and SOFR are the chosen replacement near risk-free rates ("RFRs") for LIBOR in the sterling and US dollar markets respectively.
The Exposure Drafts do not constitute recommended forms of the LMA; they have been published as exposure drafts which are open for comments from market participants. The intention of the Exposure Drafts is to facilitate awareness of the issues involved in structuring syndicated loans referencing compounded SONIA, SOFR or other RFRs and the development of an approach to these issues by market participants. At the current time, there is insufficient established market practice or infrastructure in relation to these areas to enable the LMA to publish a recommended form of syndicated facilities agreement referencing SONIA, SOFR or any other RFR. It is for individual market participants to form their own view of the extent to which they are suitable for use as the basis for preparing loan documentation for transactions. A commentary ("Commentary") has been published alongside the Exposure Drafts which considers some of the structuring issues that have emerged to date.
The Exposure Drafts are single currency facility agreements based on the compounded average of the RFR calculated on an in arrear basis over an observation period starting before the start of, and ending before the end of, an interest period. This approach is consistent with market feedback and also the development of the SONIA- and SOFR-referencing floating rate note market. The publication of the Exposure Drafts is not intended as a recommendation for any particular form of averaging calculation by the LMA. The LMA remains committed to the development of forward-looking term rates derived from RFRs and continues to advocate their importance for cash markets, particularly the loan markets. However, the LMA is cognisant that no such forward-looking term rates have yet been developed and that there may be a need and/or market demand for syndicated loans based on RFRs themselves.
The Exposure Drafts were developed in conjunction with preliminary input and views provided by a working party consisting of representatives from a wide range of market participants and advisers (including corporate borrowers and the Association of Corporate Treasurers).
The LMA is welcoming feedback from market participants on the issues discussed in the Commentary and particularly that arising from experiences relating to these issues on transactions.
The LMA intends to build on the foundations of the Exposure Drafts by preparing an exposure draft of a multicurrency facilities agreement referencing SOFR, SONIA, SARON and EURIBOR.
The Exposure Drafts and Commentary have been made available on the LMA website on the members' homepage for ease of access.
Commenting on the Exposure Drafts and Commentary, Clare Dawson, Chief Executive of the LMA, said:
"We are very pleased to launch these Exposure Drafts and accompanying Commentary to the market. The process of transition to RFRs remains an enormous task and the publication of these documents marks an important step in the transition. The move to compounded RFRs is a big step change for the loan market, which has been based on a form of LIBOR since its inception. We hope the Exposure Drafts and Commentary will help facilitate discussions as to how transactions could be executed as well as conversations with system providers. Given there is no market practice to date on this methodology in the syndicated loan market, we have been unable to provide an LMA recommended form, as there are still areas where either the market needs to come to a consensus or where regulator support is required. We continue to advocate for this support to enable the transition to progress in the loan market.
We would like to thank the Working Party members for their support for this project, and particularly the engagement of the borrower community. We look forward to a continuing dialogue with the market on the issues raised in these documents and the transition to RFRs.”