The Train Has Left the Station: LSTA Issues Revised Secondary Trading Documentation To Reflect Transition from LIBOR
Effective January 27, 2021, the Board of the Loan Syndications and Trading Association (the “LSTA”) published a revised suite of trading documents to reflect the market’s transition from the use of the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) or other alternative risk-free rates (“RFRs”) as a key benchmark for determining interest rates in the U.S. syndicated loan market.1
Although these revisions attempt to provide a flexible solution to a fluid situation, the LSTA recognizes that future updates with respect, among other things, the application of SOFR for USD-based loans, might require the LSTA to make further amendments or changes to these Trade Confirmations or any of the other trading documentation.2
Among the changes is the formula to calculate the Cost of Carry Rate, which applies where LIBOR is the applicable RFR and the underlying loan documents references an alternative RFR. Historically, the Cost of Carry Rate for LIBOR-based loans was calculated as the sum of the daily LIBOR for each day in the Delayed Period from and including the date two Business Days before the commencement of the Delayed Period until (but excluding) the date which is two Business Days prior to the Delayed Settlement Date divided by the total number of days in such Delayed Period.
Additionally, if the underlying loan references an RFR but does not reference LIBOR, the formula to calculate the Cost of Carry Rate would be the individual applicable RFR for each day in the period from and including the date five Business Days before the commencement of the Delayed Period until (but excluding) the date which is five Business Days before the Delayed Settlement Date divided by the total number of days in such Delayed Period. If the underlying loan references both LIBOR and an RFR, the Cost of Carry Rate formula would be calculated as the sum of all the individual applicable RFRs for each day in the period from (and including) the date five Business Days before the Commencement Date and to (but excluding) the date that is five Business Days before the Delayed Settlement Date divided by the total number of days in such period.
Below is a brief outline to calculate cost of carry under several scenarios:
1. USD Facility – If the credit agreement is denominated in USD, the calculation would be the Purchase Rate times the average RFR, likely the SOFR calculated per the revised formula of the updated Trade Confirmation.
2. Non-USD Facility – If the credit agreement is denominated in a currency other than the USD, the calculation would be the Purchase Price times the average RFR of that particular currency.
3. One Multi-Currency Facility – On the Commencement Date, convert the Purchase Price in each currency into one Purchase Price denominated in the Master Currency and multiply this amount by the average RFR of the Master Currency.
4. Multiple Facilities, Different Currencies per Facility – On the Commencement Date, calculate the Purchase Price of each separate facility in each relevant currency of each separate facility, and then multiply each such separate Purchase Price by the relevant RFR applicable to each such currency.
5. Unfunded Facility – Calculate the Purchase Price, and then multiply the Purchase Price by the average RFR applicable to the relevant currency of the credit agreement.
6. 25% Rule – The LSTA made no changes to the 25% Rule. As such, if the calculation of the Purchase Price is twenty-five percent (25%) greater or less on the Delayed Settlement Date than such calculation on the Commitment Date, the calculation of the cost of carry will be calculated on the Gross Purchase Price for each day during the Delay Period.
Although a new suite of LSTA trading documents was published, changes were made only to the Primary Allocation Confirmation, the Par Trade Confirmation and the Distressed Trade Confirmation. Thus, while market participants should utilize these new documents for all trades on or after January 27, the suite of trading documentation published on March 26, 2020 would remain the applicable standard documentation for trades prior to January 27.
Kleinberg Kaplan’s LIBOR transition team has been actively following the LSTA and other industry developments relating to LIBOR transition. If you have any questions or would like to discuss, please reach out to any of the authors or your regular Kleinberg Kaplan contact.
1 Note that the IBA is consulting on its intention to cease the publication of (i) all GBP, EUR, CHF and JPY LIBOR settings, and the 1 Week and 2 Month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and (ii) the Overnight and 1, 3, 6 and 12 Month USD LIBOR settings immediately following the LIBOR publication on June 30, 2023.
2 Capitalized terms used herein without definition shall have the meanings given to them in the LSTA Trade Confirmation for either Par or Distressed trades.