LIBOR AND THE SYNDICATED LOANS MARKET - MILESTONES AND DOCUMENTATION - Clifford ...
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LIBOR AND THE SYNDICATED LOANS MARKET – MILESTONES AND DOCUMENTATION
LIBOR AND THE SYNDICATED
LOANS MARKET – MILESTONES
AND DOCUMENTATION
In the UK, regulators and the Working Group on Sterling Risk-
Free Reference Rates (£RFR Working Group) have long been
urging loan market participants to transition away from using
LIBOR on transactions. Whilst, to date, such transition has been
challenging for the loan markets, recent publications such as
conventions for the use of SONIA and the LMA documentation
discussed below, will help generate impetus for transition.
£RFR Working Group of the Shell and BAT transactions) not
least due to a lack of market agreement
milestones and on the conventions for use of SONIA in
recommendations loan transactions. Whilst it would be
In April 2020, the £RFR Working Group perfectly possible for each transaction to
revised its previous milestones for adopt its own conventions,
transition with the new statement administratively and operationally this
requiring that by the end of Q3 2020, could become unworkable across
“lenders should be in a position to offer volumes of transactions.
non-LIBOR linked products to their
customers”. Acknowledging that it may Publication of a set of recommendations
take further time to transition to such by the £RFR Working Group in
products1, the £RFR Working Group September 2020 for SONIA Loan
further recommended that “after the end Market Conventions (the £RFR WG
of Q3 2020 lenders, working with their Conventions) will (combined with the
borrowers should include clear LMA documentation referred to below)
contractual arrangements, in all new and hopefully be the catalyst for a
re-financed LIBOR referencing loan seismic shift.
products to facilitate conversion ahead of
end-2021, through pre-agreed conversion The £RFR Working Group recommends
terms or an agreed process for in the £RFR WG Conventions that:
renegotiation, to SONIA or other
alternatives.” The July 2020 Q&A, which • use of SONIA as the recommended
clarifies this statement, makes clear that alternative to Sterling LIBOR is
parties must agree as much detail as implemented via a compounded in
possible in such contractual arrears methodology;
arrangements. This means that market • use of a five banking days
participants, to the extent that they are lookback without observation
unable to move immediately to shift is implemented;
transactions based on alternative risk-free
reference rates, must decide how to • where an interest rate floor is proposed,
approach this issue: there is a spectrum it may be necessary to apply the floor
of certainty ranging from the LMA’s to each daily interest rate before
suggested supplement to its compounding; and
Replacement of Screen Rate Clause • accrued interest should be paid at the
which would set out an “agreed process time of principal repayment.
for negotiation” to a document which sets
out “pre-agreed conversion terms”. The supporting documents to the £RFR
WG Conventions set out more details
This has, until now, been a relatively and examples of how they will work
difficult concept for market participants in practice.
(despite some market precedent in terms
1. The £RFR Working Group has recommended a target of all new issuances of sterling LIBOR-referencing loan
products that expire after the end of 2021 ceasing by the end of Q1 2021.
2 LIBOR and the syndicated loans market – milestones
and documentation
LMA Rate in relation to US dollars and SOFR and
has published updated fallback
Switch Agreement
language to reflect this. Although the first
In order to further support the loan fallback in this language is to a term
market in its move away from LIBOR, the SOFR rate which does not exist yet
LMA has recently published its English (vendors are currently being sought) and
law Exposure Draft of Rate Switch the second is to daily simple SOFR,
Facilities Agreement (the Rate Switch SOFR compounded in arrears is noted
Agreement) together with an as a robust alternative. Whilst there are
accompanying commentary. This aims to similarities between the ARRC
set out “pre-agreed conversion terms” by conventions for SOFR compounded in
providing that on a pre-agreed date or arrears and the £RFR WG Conventions,
upon a LIBOR cessation or pre-cessation if parties do choose daily simple SOFR
trigger event, the reference rate for the (or indeed term SOFR as and when it is
transaction will change from LIBOR to a available) then clearly alternative risk-free
risk-free reference rate. The Rate Switch reference rate related provisions different
Agreement sets out a framework which to those set out in the Rate Switch
enables parties to agree such terms Agreement would be needed. The terms
applicable to loans for which the of the Rate Switch Agreement could be
reference rate would be a risk-free amended for the purposes of transactions
reference rate such that on the “switch”, to include alternative conventions for the
no further amendments to the use of risk-free reference rates.
documentation would be required. Given
that many market participants are not, at
this stage, operationally ready to
EURIBOR
participate in new transactions based on Although provisions relating to the
risk-free reference rates, the Rate Switch transition from EURIBOR to a rate based
Agreement may be a useful tool to allow on €STR have been included in the Rate
parties to switch away from the use of Switch Agreement, as EURIBOR will
LIBOR at a time when their operational continue for the time being, decisions will
preparations for transition are complete. need to be made on transactions as to
whether the “switch” provisions should
The Rate Switch Agreement contains apply to euro denominated loans. If a pre-
provisions for loans in all relevant agreed date for a “switch” is not included,
currencies to reference compounded risk- the document could operate
free reference rates which are based on to set out fallbacks to EURIBOR on the
the £RFR WG Conventions. Given that occurrence of the cessation, or pre-
the Rate Switch Agreement contains cessation, triggers to a switch. It should
multicurrency facilities and the £RFR WG be noted that the working group on
Conventions relate to sterling and SONIA euro risk-free rates is looking at
only, is this the correct approach? Whilst identifying fallbacks for EURIBOR based
the market may regard this as on €STR and is intending to consult on
appropriate, the Rate Switch Agreement potential rates in Autumn 2020.
notes that parties will have to make an
assessment on the conventions most Market determination
suitable to their transactions and that There are, however, a number of factors
reference to the £RFR WG Conventions that parties will need to take into account
for all currencies is for reasons of in determining the conventions most
simplicity (particularly operational) and appropriate for their transactions:
ease of illustration. operational and administrative (can
Agents administer multicurrency facilities
US ARRC with different rate calculation
recommendations methodologies for different currencies?);
ease of intra-period payments (either for
Other currency specific working groups
secondary trading or prepayments); linked
have also made recommendations for
transactions (such as hedging
the use of risk-free reference rates in the
transactions); and market practice. There
syndicated loans markets. In particular,
is no reason why market practice cannot
the US Alternative Reference Rates
differ between geographies as is the case
Committee has made recommendations
LIBOR and the syndicated loans market – milestones 3
and documentation
now, where, for example, eurodollar loans reference rates, there have been very few
often have different terms to domestic US transactions which have actively
dollar loans. Market practice will also transitioned. In the Legacy Loans Paper,
need to develop in relation to linked the £RFR Working Group emphasises
products – if a loan transaction based on that “market participants should be
the Rate Switch Agreement is hedged, looking to amend their legacy GBP LIBOR
consideration will need to be given as to referencing loans now where feasible”.
whether and how the hedging Steps towards documenting the transition
documentation should be adjusted to are set out and the Legacy Loans Paper
reflect the compounding rate and spread acknowledges that “The time required for,
adjustment methodologies set out in that and considerations around, amending
loan transaction (or vice versa) or if an existing GBP LIBOR referencing loans
alternative approach may be required. should not be underestimated.” Although
ISDA is intending to publish shortly its the Rate Switch Agreement is aimed at
IBOR Fallbacks Supplement and Protocol new transactions, its provisions address
which detail fallbacks to LIBOR – whilst, use of risk-free reference rates and the
in essence, both the methodologies set £RFR WG Conventions will provide
out in the £RFR WG Conventions and market participants with food for thought
ISDA risk free rate fallback definitions are on the terms of the risk-free references
based on a backwards-looking rates to which their transactions may
compounding approach, there are transition.
necessarily some differences to reflect the
needs of the different products and their Moving forward
respective market conventions.
With the end of 2021 getting ever nearer,
it appears that crunch time in the loan
Legacy transactions markets is fast approaching. Currency
The £RFR Working Group has also specific working groups have issued
published a paper (the Legacy Loans milestones for transition and equipped
Paper) to encourage the active transition the markets with recommendations for
of legacy GBP referencing loans (other conventions for the use of risk-free
than “tough legacy loans”) from LIBOR to reference rates in loan transactions. It is
a risk-free reference rate. Although parties now up to market participants to forge
have long been aware of the wall of ahead and structure transactions based
transactions that will need to transition on reference rates which are alternatives
and, in many cases, have started to LIBOR.
diligence exercises on their books, given
a lack of precedent and recommended
conventions for the use of risk-free
4 LIBOR and the syndicated loans market – milestones
and documentation
CONTACTS
Alim Amershi Mark Campbell Charles Cochrane
Senior Associate Special Counsel Partner
London London London
T: +44 207006 3363 T: +44 207006 2015 T: +44 207006 2196
E: alim.amershi@ E: mark.campbell@ E: charles.cochrane@
cliffordchance.com cliffordchance.com cliffordchance.com
José Manuel Cuenca Lounia Czupper Peter Dahlen
Partner Partner Partner
Madrid Brussels London
T: +34 91 590 7535 T: +32 2 533 5987 T: +44 207006 2716
E: josemanuel.cuenca@ E: lounia.czupper@ E: peter.dahlen@
cliffordchance.com cliffordchance.com cliffordchance.com
Kate Gibbons Karen Hodson Julia House
Partner Partner Senior Associate
London London London
T: +44 207006 2544 T: +44 207006 2439 T: +44 207006 2206
E: kate.gibbons@ E: karen.hodson@ E: julia.house@
cliffordchance.com cliffordchance.com cliffordchance.com
Katie Hoyle Andrew Hutchins Nicholas Kinnersley
Knowledge Director Partner Partner
London Singapore London
T: +44 207006 4528 T: +65 6661 2060 T: +44 207006 8447
E: katie.hoyle@ E: andrew.hutchins@ E: nicholas.kinnersley@
cliffordchance.com cliffordchance.com cliffordchance.com
LIBOR and the syndicated loans market – milestones 5
and documentation
CONTACTS
Jonathan Lewis Dauwood Malik Toby Mann
Partner Partner Knowledge Director
Paris Hong Kong London
T: +33 1 4405 5281 T: +852 2826 3485 T: +44 207006 8864
E: jonathan.lewis@ E: dauwood.malik@ E: toby.mann@
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Gareth Old Ferdinando Poscio Jurgen van der Meer
Partner Partner Partner
New York Milan Amsterdam
T: +1 212 878 8539 T: +39 02 8063 4511 T: +31 20 711 9340
E: gareth.old@ E: ferdinando.poscio@ E: jurgen.vandermeer@
cliffordchance.com cliffordchance.com cliffordchance.com
Dr. Bettina Steinhauer Nicola Wherity Daniel Winick
Partner Partner Partner
Frankfurt London New York
T: +49 69 7199 3231 T: +44 207006 2074 T: +1 212 878 4918
E: bettina.steinhauer@ E: nicola.wherity@ E: daniel.winick@
cliffordchance.com cliffordchance.com cliffordchance.com
Daniel Zerbib
Partner
Paris
T: +33 1 4405 5352
E: daniel.zerbib@
cliffordchance.com
6 LIBOR and the syndicated loans market – milestones
and documentation
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