On 23 November 2020, the LMA published various documents with the aim of assisting market participants looking to include active LIBOR transition mechanisms in their loan documentation. These documents are a mix of new and revised versions of existing drafts, comprising:
- a revised version of the exposure draft multicurrency term and revolving facilities agreement incorporating rate switch provisions (lookback without observation shift);1
- a new exposure draft multicurrency term and revolving facilities agreement incorporating rate switch provisions (lookback with observation shift);
- a revised commentary document relating to both rate switch facilities agreements referred to above;
- a new term sheet for use in conjunction with the two exposure draft rate switch facilities agreements; and
- new supplemental wording intended as an option for parties using the LMA's Revised Replacement of Screen Rate wording published in August 20202, which includes a placeholder for pre-agreed terms in a process of renegotiation. This supplementary wording is designed as a starting point for parties looking to populate this placeholder by specifying pre-agreed terms in relation to the RFR.
A Couple of Points to Bear in Mind
It is worth pausing and noting a couple of points in relation to these documents at this stage. First, neither of these rate switch facility agreements are in recommended form yet; they remain as exposure drafts and subject to market feedback for the time being. Second, the LMA's exposure draft facility agreements that reference compounded RFRs from the outset, as opposed to the agreements referred to above that incorporate rate switch provisions (i.e., they reference LIBOR at closing and include a mechanism for transition to an RFR at a later date), have not been updated. They last were updated in February 2020.
Does This Move Us Forward?
We mentioned in our 24 September blog post3 at the time of the publication of the LMA's first exposure draft switch facility agreement (which includes the use of a five banking day lookback without observation shift) that the Working Group on Sterling Risk-Free Reference Rates ("RFRWG") had noted that a lookback with observation shift is also a viable and robust option. With this latest publication, the LMA has added the anticipated exposure draft of the rate switch agreement based on that convention to its suite of documents. It also has taken the opportunity to update the original exposure draft rate switch facility agreement (lookback without observation shift) to take into account market feedback.
The fact that the LMA has been able to update its original exposure draft rate switch facility agreement following market feedback is an indication of market participants increasingly getting their teeth into the issues around replacing LIBOR with RFRs, negotiating the points, and looking to actively document them. At the same time, the new exposure draft rate switch facility agreement (lookback with observation shift) signals, amongst other things, a recognition that no one convention has emerged as being customary in the loan market to date.5 Negotiations around the mechanics of RFRs look set to continue in detail for some time, and in some scenarios achieving a workable replacement benchmark remains a serious challenge, but in some ways that is not dissimilar to the situation when LIBOR-referenced loans were emerging.
1. This exposure draft was discussed in more detail in our previous blog post, Documenting LIBOR Transition in the Loan Markets: The LMA Offers New Solutions, But Others Likely Will Follow, 24 September 2020 ("New Solutions").
2. Discussed in more detail in New Solutions.
3. See New Solutions.
4. See the Summary of Recommendations section in the Statement on behalf of the Working Group on Sterling Risk-Free Reference Rates – Recommendations for SONIA Loan Market Conventions, RFRWG, September 2020.
5. For more discussion of rate conventions, see our blog post, An update on interest rate conventions in the SONIA-linked floating rate note markets, 24 September 2020.
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