Yesterday’s 5-pages of conventions related to SOFR in arrears in syndicated loans follow its 30 June revised Hardwired Fallbacks for Syndicated Loans and last week’s final draft “concept credit agreement” from the LSTA, and are relevant both to new SOFR-based loans and to the fallbacks that may be selected for an existing USD LIBOR loan, and should help guide lenders to agree about how to fine-tune the rate calculation:
- whether, and if so how, to calculate interest on a simple or the (more accurate) compound basis.
- observation period or “lookback” period (for more detail, see this note we did in March).
- the differences between the “compound the rate” and the “compound the balance” method: there are several nuances here, and the key point is that compounding the rate would not be accurate if there are mid-period principal repayments
- how to deal with weekends and public holidays.
- day count, (360 for USD), business day convention (modified following, as for LIBOR), and rounding.
- floors – where it recommends that for LIBOR loans where fallback wording is being included, the floor should be put under the sum of SOFR plus the credit spread; but for new loans, it recommends applying it to SOFR. It also recommends the floor be calculated daily, i.e. in respect of each overnight rate, noting that “loans accrue interest daily and loan funds strike a daily net asset value based on this daily accrued interest”.
- break costs – it recognises that traditional break costs will not exist but notes that “there is recognition that credit agreements may include language that compensates lenders for funding losses, e.g., losses sustained due to an intra-period prepayment”.
Clients will be pondering these and consensuses will emerge, and you need to know that there are possible variations - there is yet no one method of calculating a backwards-compounded RFR-based interest rate – but most lawyers should not need to go further into it.
and then 