LMA exposure drafts of compounded risk-free rate facility agreements for sterling and US dollars
The LMA has published 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").
The Exposure Drafts do not constitute recommended forms of the LMA. 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. Market participants choosing to use the Exposure Drafts as the basis for preparing loan documentation for transactions should note that in the absence of established market practice the Exposure Drafts do not offer any standardised position in relation to a number of fundamental structuring issues. Those issues are discussed in the Commentary but will require consideration and resolution by the relevant parties in the context of the relevant transaction.
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 would welcome feedback from market participants on the issues discussed in the Commentary and particularly that arising from experiences relating to these issues on transactions. Any feedback should be sent to lma@lma.eu.com and headed "Market feedback on Exposure Drafts of Compounded Facilities Agreement". Whilst the LMA is always grateful to receive drafting comments the current focus is on points of principle, and, in particular, on the issues discussed in the Commentary. Accordingly the preference would be for feedback not to be provided in the form of a mark-up of the Exposure Drafts.
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 are available below.