LMA publishes exposure draft of reference rate selection agreement for transition of legacy transactions to risk-free rates25 October 2019
The LMA is pleased to announce the publication of an exposure draft reference rate selection agreement ("Reference Rate Selection Agreement") for use in relation to legacy transactions transitioning from LIBOR to alternative reference rates.
The Reference Rate Selection Agreement is published as an exposure draft and does not constitute a recommended form of the LMA; it has been published as an exposure draft which is open for comment from market participants. At the current time, there is insufficient established market practice to enable the LMA to publish a recommended form of Reference Rate Selection Agreement. It is for individual market participants to form their own view of the extent to which the exposure draft Reference Rate Selection Agreement is suitable for use as the basis for preparing documentation for transactions.
The syndicated loan market does not have a protocol system for amendments (such as that operated by ISDA) given the multilateral nature of syndicated loans. Therefore each individual loan agreement referencing LIBOR would need to be amended to refer to a replacement benchmark rate. The purpose of the exposure draft Reference Rate Selection Agreement is to streamline the process of transition to alternative reference rates through the use of the same form of agreement on different transactions. In addition, under the Reference Rate Selection Agreement, the parties would agree the basic commercial
terms for the selection of the applicable alternative reference rate(s) and then authorise the Agent and the Obligors to determine the necessary amendments to the relevant facility agreement in accordance with the terms set out in the Reference Rate Selection Agreement. Whilst this is a two stage process, it is expected to make the process of agreement to such amendments easier to manage for the Agent and also the Lenders (who would not need to approve all of the changes to the relevant facility agreement).
The exposure draft Reference Rate Selection Agreement is intended to be read alongside the exposure drafts of compounded risk-free rate facility agreements for sterling and US dollars published by the LMA on 23 September 2019. The publication of the Reference Rate Selection Agreement is not intended as a recommendation for any particular form of amendment process.
The Reference Rate Selection Agreement was 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 exposure draft Reference Rate Selection Agreement, particularly that arising from experiences on transactions.
The exposure draft Reference Rate Selection Agreement has been made available on the LMA website to LMA members.
Commenting on the Reference Rate Selection Agreement, Clare Dawson, Chief Executive of the LMA, said:
"We are very pleased to launch the exposure draft Reference Rate Selection Agreement to the market. This marks another important step in the transition from LIBOR to risk-free rates in the syndicated loan market. The task of transitioning legacy LIBOR-referencing transactions to RFRs cannot be overestimated given the need to amend each loan agreement individually. The LMA hopes that the Reference Rate Selection Agreement will help facilitate the streamlining of the amendment process, in particular by providing a form of agreement which could be used for different transactions based on LMA recommended forms. There are certainly other approaches that could be adopted in respect of the amendment process, which we have outlined in the introduction to the Reference Rate Selection Agreement. Following consultation with a Working Party, we think that the approach adopted in the exposure draft Reference Rate Selection Agreement represents a helpful way of streamlining what is undoubtedly going to be a cumbersome process.
We would like to thank the Working Party members for their support for this project, and particularly the engagement of the borrower and agent community. We look forward to hearing feedback from the market on the exposure drafts and will work to produce recommended forms as market practice develops.”