The Loan Syndications and Trading Association (“LSTA”), an industry group for the syndicated credit market, is constantly working with various members on a SOFR credit agreement that shows what a SOFR loan contract would look like. The document is still in the pipeline, but it is useful when considering changes to loan contracts from LIBOR to SOFR. 3 The concept document of 13 July 2020, the daily simple SOFR project or DesDaily Compounded SOFR (Compound the Balance) Concept Document and other forms of SOFR LSTA credit contracts are available under www.lsta.org. In April 2019, the Alternative Reference Rate Committee (ARRC), a group of private market participants convened by the Federal Reserve and the NY Fed to deal with LIBOR`s transition, released proposed fallback language for many assets, including syndicated loans. The language included two iterations. The first was the “amendment” in which the administrator and the borrower would jointly choose a new reference rate that would replace libor later and then amend the loan agreement accordingly; Lenders, who hold a large portion of the debt, would have five working days to oppose the change. The second approach was the “hardwired approach,” in which the reference rate automatically switches from LIBOR to a new rate when one of them appears on a series of triggers. Applying the securely wired approach would preclue the need for an amendment process, but the right of the borrower and lenders to accept the changes and make adjustments when the new interest rate is applied would also be removed. Initially, the ARRC proposed both the amendment and the cable approaches to the credit market, assuming that it would take some time for the parties to adopt a cable approach that would refrain from making the change. At the time, the ARRC was optimistic that the cable approach would be more widespread by the end of 2020. It is not done yet. Cadwalader worked closely with the Loan Syndications and Trading Association (LSTA) to develop a document on the “conceptual loan agreement” that refers to a composite average of late-term SOFR.
The document, which was distributed to a wide range of market participants for audits and feedback, is part of ongoing efforts to inform interested parties of the LIBOR replacement benchmarks. It will serve as a tool to familiarize several institutions with reference alternatives that, in turn, can contribute to the transitional planning of LIBOR.