ACT Borrower's Guide To The LMA's Recommended Forms of Facility Agreement For Loans Referencing RFRs - v2

THE LMA’S RECOMMENDED
FORMS OF FACILITY AGREEMENT

FOR LOANS REFERENCING
RISK-FREE RATES
A Borrower’s Guide
Produced for the Association of Corporate Treasurers
by Slaughter and May
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CONTENTS
Introduction 4 4.1 UK RFRWG recommendations 21
Defined terms 6 4.2 Compounding calculation 21
PART I - LIBOR TRANSITION ESSENTIALS 8 4.3 Lookback period 22
1. Working Groups8 4.4 Observation shift 22
1.1 A market-led effort 8 4.5 Interest rate floors 23
1.2 Cross-currency co-ordination 8 4.6 Recommendations of other national Working Groups 23
2. The transition timetable 9 5. Data sources 25
2.1 When will LIBOR cease to be published? 9 6. Credit adjustment spread (CAS) 27
2.2 “Pre-cessation” and synthetic LIBOR 11 6.1 Pricing of RFR loans 27
2.3 What does this mean for the availability of LIBOR loans? 12 6.2 How is the CAS to be calculated? 27
2.4 Considerations in relation to USD LIBOR loans 13 6.3 Screen rate CAS 28
2.5 What about non-LIBOR related “amend and extend” transactions? 13 6.4 The US approach 28
2.6 What about amending existing LIBOR loans? 14 7. The LMA RFR Templates 29
3. Replacement rates 16 7.1 The LMA’s LIBOR transition resources 29
3.1 Rate options 16 7.2 Recommended forms of facility agreement for RFR-linked loans 29
3.2 EURIBOR 18 7.3 Next steps 29
3.3 Term SONIA 18 8. Hedging considerations 30
3.4 Term SOFR 19 8.1 Active transition or transition by way of fallback 30
3.5 Other term RFRs 20 8.2 The ISDA IBOR Fallbacks 31
4. Conventions for referencing RFRs compounded in arrears in loans 21 9. Beyond LIBOR 32
THE LMA’S RECOMMENDED FORMS OF FACILITY AGREEMENT FOR LOANS REFERENCING RISK-FREE RATES 2
PART II – COMMENTARY ON THE RFR TERMS IN 5.1 Term Rate Currency fallbacks 47
THE COMPOUNDED/TERM MTR 34
5.2 Compounded Rate Currency fallbacks 48
1. Introduction 34
5.3 New definition of cost of funds 48
2. Interest provisions - overview 35
6. Market disruption 50
2.1 Calculation of interest 35
7. Prepayments 51
2.2 Reference Rate Terms 35
7.1 Break costs 51
2.3 Alterations to Reference Rate Terms 35
7.2 Voluntary prepayments 51
3. Interest on Compounded Rate Loans 37
8. Changes to the reference rates 52
3.1 NCCR vs CCR 37
Appendix to Part II - Compounding formulae 54
3.2 Length of lookback 38
PART III – FURTHER INFORMATION AND KEY CONTACTS 56
3.3 Observation shift or not 38
1. Further information 56
3.4 Business Days, Additional Business Days
and RFR Banking Days 38 1.1 General 56
3.5 Day count conventions, interest calculation 1.2 Trade associations 56

and payment conventions 39 1.3 Data sources 56
3.6 Zero floors 40 1.4 GBP 56
3.7 Credit adjustment spread (CAS) 42 1.5 USD 57
3.8 Application of Sterling Loan Conventions 44 1.6 EUR 57
3.9 Interest periods 44 1.7 CHF 57
4. Rate switch for Term Rate Currencies 45 1.8 JPY 57
5. Fallbacks 47 2. Key Contacts 58
Introduction
Since the beginning of 2021, the volume of loans referencing risk-free rates The interest provisions of the LMA RFR Templates are quite complex in
(RFRs) has increased sharply. Some borrowers have moved to RFR terms to comparison to LIBOR terms. Treasurers contemplating their first RFR-linked loan
the exclusion of LIBOR terms. Others have opted for a “rate switch” might feel that the transition is akin to learning a new language. The terminology
mechanism, meaning the facility converts from LIBOR terms to RFR terms is different, the conventions are different and there are multiple options, where
automatically on a future date or the occurrence of specified triggers. The Loan previously there was a single route. It will take time for the vocabulary of RFRs
Market Association (LMA) exposure draft RFR facility templates, updated last to become as entrenched and familiar as the lexicon of LIBOR. However, the
November to reflect the recommended SONIA loan conventions developed by growing consensus on the best approach to RFR lending, including the
the Working Group on Sterling Risk-Free Reference Rates (UK RFRWG), have emergence of the LMA RFR Templates, suggests that fluency should be easier
played a key role in increasing the numbers of borrowers that are including RFR to attain than was the case for borrowers who worked with RFRs during 2020.
terms in their loan facilities.
This Guide aims to assist treasurers approaching the LMA RFR Templates for
The LMA’s exposure draft RFR terms have been used in term and revolving the first time, whether in the course of raising new money, or as a result of the
syndicated loans, both in sterling and in other currencies. They have also been need to amend existing LIBOR facilities that extend beyond the end of this year:
adapted for bilateral loans. In most cases, the LMA’s framework drafting for
RFRs has been adopted with fairly minimal adjustment, suggesting that lenders • Part I covers “LIBOR Transition Essentials”, a brief background to RFRs and
are becoming broadly comfortable with the LMA’s approach. This enabled the the UK’s approach to LIBOR transition in the loan market, the UK RFRWG’s
LMA to replace the exposure drafts with its first recommended forms of facility recommended conventions for referencing RFRs in loans and an overview of
agreement for loans referencing RFRs (the LMA RFR Templates) on 30 March the LMA RFR Templates.
2021. The RFR terms reflected in the LMA RFR Templates will be rolled out • Part II is a commentary on the interest rate and related provisions of the
across the LMA’s documentation library in due course. most comprehensive of the LMA RFR Templates, the LMA’s recommended
The publication of the LMA RFR Templates is a significant development, given form of facility agreement for multi-currency facilities referencing RFRs and/
new LIBOR loans are anticipated to disappear entirely over the course of this or term rates (the Compounded/Term MTR). It explains the key provisions
year. The UK RFRWG’s 31 March 2021 target for the cessation of new sterling of the Compounded/Term MTR and how the RFR terms differ from IBOR
LIBOR loans has already passed, so for sterling borrowers, LIBOR is no longer terms. It also highlights the provisions of the Compounded/Term MTR that
an option. The deadlines for the cessation of new LIBOR business in other borrowers might seek to adjust or negotiate.
currencies are imminent. In the syndicated loan market, attainment of the • Part III contains links to sources of further information and contact details
various Working Groups’ targets for the cessation of new LIBOR business is for the Association of Corporate Treasurers (ACT) and the Slaughter and
heavily dependent on the availability of operationally workable and standardised May LIBOR transition teams.
documentation terms.
The commentary in Part II has been prepared on the assumption that most
corporates reading this Guide will not be LMA members and so will not have
access to the LMA documentation library. The key provisions are therefore
summarised alongside our observations on those provisions. Treasurers may,
however, find it helpful to review this Guide alongside a copy of the relevant
terms, to properly familiarise themselves with the LMA RFR Templates. The
LMA’s RFR documentation is available to LMA members only, although it can be
provided to non-members (for example, by legal advisers or relationship banks)
in the course of a transaction. Some borrowers have joined the LMA, providing
them with direct access to LMA documentation and guidance on LIBOR transition.
Further information on LMA membership is available on the LMA website.
This Guide considers only the interest rate and related provisions of the LMA
RFR Templates. It does not cover other provisions of the Compounded/Term
MTR that borrowers might wish to discuss with their lenders, which remain
unchanged from the LMA’s pre-existing LIBOR/EURIBOR facility templates.
The ACT Borrower’s Guide to the LMA’s Investment Grade Agreements (the
ACT Borrower’s Guide) contains comprehensive guidance for borrowers on
the provisions of the LMA facility templates more generally. The current edition
of the ACT Borrower’s Guide speaks to the LMA multi-currency term and
revolving facilities agreement referencing LIBOR and EURIBOR, from which the
Compounded/Term MTR is derived. Our aim is to produce a fully revised
version of the ACT Borrower’s Guide that speaks to the Compounded/Term
MTR in due course, when RFR lending terms have become more established.
Slaughter and May

12 April 2021
Defined terms
€STR means the Euro Short-Term Rate. Compounded Rate Loan means a loan in a Compounded Rate Currency.
5YHLB means the CAS calculation methodology based on the historic median Euro Working Group means the Working Group on Euro Risk-Free Rates.
between LIBOR and the relevant RFR over a five-year lookback period from
an agreed date. FCA means the UK Financial Conduct Authority.
ACT means the Association of Corporate Treasurers. Forward approach means the CAS calculation methodology based on the
forward-looking basis swap market, involving using forward-looking basis
ACT Borrower’s Guide means the ACT Borrower’s Guide to the LMA’s swaps to calculate the implied future spread between the relevant RFR and
Investment Grade Agreements, produced for the ACT by Slaughter and May LIBOR over the life of the loan and calculated as the linear interpolation
(September 2017). between differing tenors of LIBOR swaps and RFR swaps.
ARRC means the Alternative Reference Rates Committee, the US RFR FSB means the Financial Stability Board.
working group.
IBOR MTR means the LMA recommended form of multi-currency term and
BISL means Bloomberg Index Services Limited, appointed by ISDA to publish revolving facilities agreement.
the fallback rates and CAS for use in derivatives on the cessation/pre-cessation
of LIBOR. ISDA IBOR Fallbacks means the ISDA Supplement and ISDA Protocol
(each as separately defined).
CAS means credit adjustment spread, a separate amount to (optionally) be
added to the compounded RFR to account for the economic difference ISDA Protocol means ISDA’s IBOR Fallbacks Protocol, published in October
between LIBOR and the relevant RFR. 2020 and effective from 25 January 2021.
CCR means cumulative compounded rate, being the compounded RFR rate ISDA Supplement means ISDA’s IBOR Fallbacks Supplement, published in
applicable over a given period. October 2020 and effective from 25 January 2021.
Compounded/Term MTR means the LMA recommended forms of multi- LMA means the Loan Market Association.
currency term and revolving facilities agreement referencing compounded LMA RFR Templates means the LMA recommended forms of facility
/term rates published on 30 March 2021. agreement for loans referencing RFRs, comprising the Compounded/Term
Compounded Rate Currency means a currency made available under MTR, the Rate Switch MTR and the Single Currency MTR (in each case, with
the Compounded/Term MTR and for which the interest rate is determined and without observation shift).
by reference to a compounded RFR.
Lookback with observation shift (or shift) means the convention pursuant to Single Currency MTR means the LMA recommended forms of multi-currency term
which the daily RFR is weighted in the compounding calculation according to the and revolving facilities agreement referencing either SONIA or SOFR published on 30
number of calendar days in the observation period rather than the number of March 2021.
calendar days in the interest period.
SOFR means the Secured Overnight Financing Rate.
Lookback without observation shift (or observation lag) means the convention
pursuant to which the daily RFR is weighted in the compounding calculation SONIA means the Sterling Overnight Index Average.
according to the number of calendar days in the interest period rather than the Sterling Loan Conventions means the UK RFRWG’s Recommendations for
number of calendar days in the observation period. SONIA Loan Market Conventions published in September 2020.
NCCR means non-cumulative compounded rate, as recommended by the UK Swiss Working Group means the National Working Group on Swiss Franc
RFRWG in the Sterling Loan Conventions, calculated by taking the CCR for a Reference Rates.
given day and deducting the CCR for the previous day, giving a daily compounded
rate that allows the calculation of a daily interest amount. Term Rate Currency means a currency made available under the
Compounded/Term MTR and for which the interest rate is determined by
Pre-cessation, in the context of a reference rate, refers, in summary to the date reference to a forward-looking IBOR (eg EURIBOR).
on which a relevant supervisor declares that the rate is no longer representative
of the underlying market or economic reality it is intended to represent. Term Rate Loan means a loan in a Term Rate Currency.
PRA means the Prudential Regulatory Authority. TONAR means the Tokyo Overnight Average Rate.
Rate Switch MTR means the LMA recommended forms of multi-currency term TSRR means term SONIA reference rate, a forward looking term rate derived
and revolving facilities agreement incorporating rate switch provisions published from SONIA.
on 30 March 2021.
UK RFRWG means the Working Group on Sterling Risk-Free Reference Rates.
RFR means risk-free rate.
Working Groups means the national working groups convened in each
RRSA means the LMA Reference Rate Selection Agreement, at the time of LIBOR currency jurisdiction to catalyse market-led transition from
writing still in exposure draft form. LIBOR to alternative rates.
SARON means the Swiss Average Rate Overnight. Capitalised terms used in this Guide and not otherwise defined have the meanings
given in the Compounded/Term MTR.
PART I - LIBOR TRANSITION ESSENTIALS
1. Working Groups
1.1 A market-led effort The UK RFRWG’s recommendations are reflected in the LMA RFR Templates,
which were produced, in accordance with the normal LMA process, by an LMA
Following the Financial Stability Board (FSB) recommendation in 2014 that RFRs documentation working party predominantly comprised of financial institutions
should be pursued as alternatives to LIBOR, national regulators convened working and legal advisers.
groups in each LIBOR currency jurisdiction (the Working Groups) to catalyse
market-led transition from LIBOR to alternative rates. Each main Working Group The ACT participates in the UK RFRWG, the loans sub-committee (as well as other
has a network of sub-committees and task forces made up of specialists with product sub-committees and task forces) and the LMA documentation working
a remit to focus on particular products or particular aspects of the transition party, alongside a small group of treasurers representing larger corporates.
project (such as systems and infrastructure). These Working Groups have taken
the lead in recommending replacement rates and related calculation conventions 1.2 Cross-currency co-ordination
and practices. They have also been driving the transition timetable. The Working Groups and the various trade associations are making efforts to
The Working Groups do not have regulatory powers, but their co-ordinate their approach to LIBOR transition across products and currencies.
recommendations, which are the product of extensive consultation and industry However, the fact that LIBOR, a benchmark with a single consistent
engagement, are having, and will continue to have, a material influence on methodology, is being replaced with a menu of single currency rates with
practice. Further, global and national financial sector regulators have emphasised differing characteristics, inevitably results in some variations. The FSB’s
their support for market-led transition efforts. The Bank of England and the communications emphasise the need for cross-jurisdictional co-operation, but
Financial Conduct Authority (FCA), for example, have made clear to regulated acknowledge that complete homogeneity in terms of the approach to
firms that they are expected to adhere to industry and Working Group replacement rates will not be possible in a multi-rate environment.
transition targets. The FCA has also stated that firms are more likely to be able This gives rise to challenges in the context of multi-currency products such as
to demonstrate that they have complied with their regulatory obligations to certain loans, where users may need to have an awareness of the conventions
treat customers fairly in this context if they adopt solutions recognised by the and recommendations of the Working Groups in each relevant currency
relevant Working Groups. jurisdiction. The international nature of the financial markets also means there
The loans sub-committee of the UK RFRWG, has led the development of a may be differences in the replacement rates and calculation conventions
recommended approach to transitioning syndicated and bilateral loans from applicable to certain currencies (eg USD) between those applicable in domestic
LIBOR. The UK RFRWG’s recommendations for the sterling loan market are and those used in cross-border deals. The approach to managing currency
drawn together in the recently updated Best Practice Guide for GPB Loans. variations in the LMA RFR Templates is outlined at section 3.8 of Part II.
This is essential reading for sterling borrowers.
2. The transition timetable
2.1 When will LIBOR cease to be published?
The diminishing availability of LIBOR loans is driven by the relatively short
amount of time left before the majority of LIBOR rates cease to be published.
Since mid-2017, the regulators have been emphasising that the availability of
LIBOR should not be relied on after 31 December 2021. On 5 March 2021, the
FCA finally confirmed the dates on which all 35 LIBOR rates will either cease to
be published, or will be considered to “lose representativeness”.
According to the FCA’s announcement, 24 of the 35 LIBOR rates that are
currently published daily will cease to be published after 31 December 2021 in
accordance with the expected timetable. Certain USD LIBOR rates will continue
to be published through to 30 June 2023. A third and limited category of sterling,
USD and JPY rates may continue to be published based on a revised methodology,
the so-called “synthetic LIBOR”.
The dates and actions applicable to each currency/tenor pair are summarised in
the table overleaf.
LIBOR cessation/pre-cessation dates
Overnight
1 wk 1 mth 2 mth 3 mth 6 mth 12 mth
/Spot Next
NR 31.12.21 NR 31.12.21 NR 31.12.21

Sterling Ces 31.12.21 Ces 31.12.21 Ces 31.12.21 Ces 31.12.21
Synth to ? Synth to ? Synth to ?
NR30.06.23 NR30.06.23 NR30.06.23

Dollar Ces 30.06.23 Ces 31.12.21 Ces 31.12.21 Ces 30.06.23
Synth to ? Synth to ? Synth to ?
Euro Ces 31.12.21 Ces 31.12.21 Ces 31.12.21 Ces 31.12.21 Ces 31.12.21 Ces 31.12.21 Ces 31.12.21
CHF Ces 31.12.21 Ces 31.12.21 Ces 31.12.21 Ces 31.12.21 Ces 31.12.21 Ces 31.12.21 Ces 31.12.21
NR 31.12.21 NR 31.12.21 NR 31.12.21

JPY Ces 31.12.21 Ces 31.12.21 Synth to Ces 31.12.21 Synth to Synth to Ces 31.12.21
31.12.22? 31.12.22? 31.12.22?
Key
Ces - publication of LIBOR rate ceases NR - LIBOR rate is non-representative Synth - FCA to consult on publication of a synthetic LIBOR rate
2.2 “Pre-cessation” and synthetic LIBOR If a rate such as LIBOR loses representativeness,
regulated financial institutions will be prevented from
The concept of “synthetic LIBOR” stems from the using it in many contexts by the EU and UK regulatory
UK’s proposal to protect the continuity of certain framework that governs the use of important
legacy LIBOR contracts by statute. The Financial benchmarks. For all practical purposes, this means
Services Bill 2021, which at the time of writing is that if a LIBOR rate becomes non-representative,
making its way through Parliament, empowers the consequences are no different to had it ceased.
the FCA, in summary, to require the continued
publication of LIBOR, following it losing The purpose of the FCA’s formal determination that
representativeness, for a specified period using certain LIBOR rates will lose representativeness on
a synthetic methodology. a particular date is that a loss of representativeness,
under the provisions of the Financial Services Bill
A rate losing representativeness means it is 2021, paves the way for the FCA to take steps, if the
considered by the regulator to have ceased being conditions in the Bill are satisfied, to replace the
representative of the underlying market or economic non-representative rate with a synthetic LIBOR rate.
reality it is supposed to represent, and that
representativeness will not be restored. A rate In policy statements published alongside its 5 March
becoming non-representative in this way may be a announcement, the FCA has indicated that
trigger for the application of fallback rate provisions, “synthetic LIBOR” is likely to comprise a forward-
rate switch provisions, or clauses providing for the looking term rate version of the RFR in the relevant
re-negotiation of the agreement in question to currency (eg term SONIA, see section 3.3 below)
replace the relevant rate, all of which may appear plus a fixed credit adjustment spread calculated on
in LIBOR-referencing loans. Such triggers are often the 5 year historic median basis (see section 6
referred to in the context of LIBOR transition as below). FCA-regulated institutions will only be
“pre-cessation” triggers. The application of pre- allowed to use synthetic LIBOR to the extent
cessation triggers in the context of the LMA RFR specifically permitted by the FCA. The FCA is
Templates is discussed in section 8 of Part II. expected to consult further on the availability of,
and uses for, synthetic LIBOR during Q2 2021.
2.3 What does this mean for the availability of LIBOR loans? • CHF, JPY and euro: The Swiss and Japanese RFR working groups have
recommended that new LIBOR loans should cease after the end of Q2 2021.
The provisions in the Financial Services Bill 2021 and the creation of synthetic As euro LIBOR is rarely used, and there are no current plans to discontinue
LIBOR are aimed solely at preventing disruption to certain “tough” legacy EURIBOR (see section 3.2 below), formal transition deadlines have not been set,
LIBOR instruments that cannot be transitioned and do not contain appropriate but the effective deadline for the cessation of new euro LIBOR business is
fallback triggers dealing with the cessation or pre-cessation of LIBOR. Precisely 31 December 2021, when euro LIBOR will cease to be published.
which contracts will fall within the scope of this regime, the duration of
synthetic LIBOR and the existence of any safe-harbour provisions that might The most recent iteration of the UK regulators’ expectations is set out in a Dear
protect users of synthetic LIBOR from the risk of related litigation, remain CEO letter written by the FCA and the Prudential Regulatory Authority (PRA)
subject to the on-going legislative and regulatory process. The FCA is therefore on 26 March. This letter underlines strongly the expectation that from 1 April,
continuing to urge market participants to take active steps to transition legacy there will be no incremental sterling LIBOR business. It states that new issuance
instruments, rather than rely on this, or any other, legislative solution1. after that date and expiring beyond end 2021 would “potentially be viewed as poor
risk management and poor governance of [LIBOR] transition”. In the context of
What is clear is that synthetic LIBOR, if it is published at all, will not be available syndicated lending specifically, the regulators’ view is that if certain banks in the
for use in new loans and refinancings. Companies raising or refinancing LIBOR syndicate are proving an obstacle to RFRs, they should be not be included in the
loans are expected to use alternative rates, in accordance with the transition syndicate. The Dear CEO letter also states that firms are expected to adhere to
timetable set by the Working Groups in the relevant currency jurisdictions: foreign working group milestones in relation to the cessation of LIBOR business in
• Sterling: The deadline set by the UK RFRWG for the cessation of new other currencies and that the regulators expect firms to work “with pace and
sterling LIBOR-referencing loans expiring after the end of 2021 was 31 March intensity to further the adoption of RFRs in all markets in which they are active”.
2021. New sterling loans that extend beyond the end of 2021 (including The letter does note that if end-users ie borrowers are not ready for RFRs,
refinancings) are no longer available on LIBOR terms. alternative funding solutions are available, such as “the use of a fixed rate,
• USD: The Alternative Reference Rates Committee (ARRC), the US RFR alternative floating rate or short-term LIBOR-linked facility that expires before end
working group, has set a target of the end of Q2 2021 for the cessation of new 2021”. This potentially provides some breathing space for sterling borrowers
USD LIBOR loans2 , although in practice, it appears that the deadline for the that need to raise funds but are not quite ready for RFRs from an operational
cessation of USD LIBOR business is the end of 2021 (see section 2.4 below). perspective. A short term sterling LIBOR-linked facility could be put in place
New USD LIBOR loans are therefore anticipated to be available for the that rolls into a RFR-linked facility (via a rate switch or forward start
remainder of this year, but not thereafter. mechanism) at the end of the year if banks were willing. However, we would
1
Legislative solutions to facilitate LIBOR transition have also been put forward by the EU and in the US. While each jurisdiction is taking a slightly different approach,
in common with the UK’s proposals, the EU and US frameworks leave the precise scope of application to be determined by secondary measures.
2
ARRC Best Practices for LIBOR Transition.
expect that the application of any alternative solutions will be very limited and extension proposal emerged that there will be restrictions on the new use of
lenders would need to be convinced that RFRs are not possible, as well as having USD LIBOR by UK regulated entities after the end of 2021. This was reinforced
a clear indication of when the borrower is likely to be ready to transition to RFRs. in the Dear CEO letter circulated by the FCA and the PRA on 26 March 2021
which states that regulated firms “should ensure they cease new use of USD LIBOR
Based on the above, while the regulators have put a brake on new sterling LIBOR as soon as practicable and no later than the end of 2021, in line with the supervisory
loans extending beyond the end of the year, loans in other LIBOR currencies may guidance issued by the US authorities”.
continue to be written in the remaining months until the deadlines specified above by
the authorities in the relevant country. To that extent, borrowers have the ability to Borrowers in need of new USD facilities between now and the end of 2021,
stagger their transition to RFRs by currency. However, it is to be anticipated that any therefore may have the option of retaining LIBOR for USD drawings. However,
new LIBOR faciltiies will need to include rate switch provisions in most cases that this is expected to be on the basis that the documents include a rate switch to
provide for the automatic switch from LIBOR to RFRs at the appropriate time. See effect the automatic implementation of alternative rates, or alternatively, are
further section 2.4 below in relation to USD LIBOR loans, and section 2.6 below in re-opened at an appropriate future date to implement the amendments required
relation to rate switch provisions and the transition of legacy LIBOR loans generally. to accommodate alternative rates.
2.4 Considerations in relation to USD LIBOR loans Borrowers raising new USD LIBOR funds should consider carefully the date on which
such USD LIBOR loans should switch to SOFR. If the borrower is ready to switch
The proposal, now confirmed, to continue to publish most of the USD LIBOR later in the year, USD LIBOR loans can of course be transitioned to RFRs at the end of
tenors until 30 June 2023 has prompted queries about whether the end of Q2 2021 alongside sterling facilities. Liquidity in SOFR interest rate derivatives may
2021 remains the ARRC’s target date for the cessation of new USD LIBOR be a factor that influences the preferred transition date of USD LIBOR loans
business. The extended publication of certain USD LIBOR tenors to June 2023 with associated hedging. As discussed in section 8.2 below, USD LIBOR hedging
is intended solely to allow more time for the run off of legacy USD LIBOR that incorporates the ISDA IBOR Fallbacks will not move to SOFR on 1 January
contracts (it is estimated that some 60% of USD LIBOR exposures will run off 2022 when the first USD LIBOR tenors cease, but will instead reference interpolated
by that date, substantially reducing the legacy book to be transitioned). The rates derived from the remaining maturities through to June 2023.
extension should not mean that USD LIBOR continues to be used for new deals.
The ARRC’s recommendation remains that there should be no more USD 2.5 What about non-LIBOR related “amend and extend” transactions?
LIBOR loans after the end of Q2. The US authorities’ supervisory guidance
encourages banks to “cease entering into new contracts that use USD LIBOR as a The UK RFRWG’s target deadlines for the cessation of sterling LIBOR loans
reference rate as soon as practicable and in any event by December 31 2021”. refer to new and refinanced loans3. Does this mean that if existing facilities are
amended (for example, to extend their maturity), they must be amended to
The US supervisory guidance rather than the ARRC’s deadline may drive the accommodate RFRs at the same time? There is also of course the question of
timetable for the cessation of new USD LIBOR loans in the London market and whether the same applies to legacy LIBOR loans in other currencies according
it would be helpful if this could be clarified. The FCA indicated when the to the relevant authorities’ target deadlines.
Where no new money is being advanced and there are no changes to the lending Guide is therefore relevant to companies amending legacy loans, as well as those
group, one might take the view based on the wording of the UK RFRWG’s in the market for new money.
recommendations that it is not necessary to deal with replacing LIBOR at the
same time, and that transition can be put off to later in the year. However, the When amending a legacy LIBOR loan to incorporate RFR terms, the approach
recommendations and guidance are not legislation or regulations capable of rigid and process should be considered in addition to the applicable RFR terms:
interpretation, and the financial sector is under pressure from regulators to get • RFRs or rate switch mechanism? Some borrowers may be keen to put a
the job done as quickly as possible. plan in place to transition from LIBOR, but may have good reasons to defer
Whether amendments are deemed to trigger a requirement to update the the application of RFRs until later in the year (or beyond, in the case of USD
facility for LIBOR transition therefore depends on the approach that the lenders loans). Some companies may simply need a few more months to update
involved have determined is prudent. Many lenders have very large books of treasury systems to manage RFRs. Where loans need to be closely aligned to
LIBOR business, and where documents are being re-negotiated anyway, may be existing hedging, and the related swap is to transition in accordance with
keen to deal with LIBOR transition at the same time, or even have adopted a ISDA’s IBOR fallbacks which will not apply until the relevant LIBOR rate
house policy to that effect. ceases or loses representativeness (see section 8 below), deferring the
application of RFR terms to the loan to align with the fallback triggers in the
2.6 What about amending existing LIBOR loans? swap may be the preferred route.
Some borrowers will have been contacted by their banks about amending Such borrowers may prefer to amend their facilities to incorporate a rate
existing LIBOR loan terms already. This process is anticipated to accelerate from switch mechanism that converts the LIBOR facilities to pre-agreed RFR
now. The UK RFRWG has suggested that, where viable, the transition of legacy terms automatically on a future agreed date (eg the end of Q3 2021, or upon
sterling LIBOR products to alternative rates is effected during Q2 and Q3 2021 the cessation or non-representativeness of the relevant LIBOR rates). Rate
and if not viable, robust fallbacks are adopted where possible. This was strongly switch mechanisms have been widely used over the last six months. The LMA
reiterated in the FCA and PRA’s Dear CEO letter of 26 March: RFR Templates include forms of rate switch agreement (see section 7 below)
and framework drafting is also included in the Compounded/Term MTR (see
“All sterling legacy LIBOR contracts should, wherever possible, have been amended by section 4 of Part II below).
end Q3 2021 to include at least a contractually robust fall-back that takes effect upon
an appropriate event, or, preferably, an agreed conversion to a robust alternative The UK RFRWG’s recently updated Best Practice Guide for GBP Loans
reference rate. Actions with respect to non-sterling exposures should be consistent notes: “Market participants should not expect to rely on rate switch agreements
with the relevant timelines for that currency.” or a pre-agreed process for re-negotiation beyond the end-Q1 milestone for new
GPB loans.” This wording and the reference to new loans suggests that it is
The amendment process, in many cases, will involve RFR terms in the LMA RFR possible to do so in the context of legacy LIBOR loans. That legacy loans do
Templates being incorporated into existing facilities. The commentary in this
3
See Priorities and roadmap for transition by end-2021 and Q&A.
not need to be amended to move directly to RFRs before the end of the year commercial agreement by entering into a formal amendment agreement that
is also reflected in the UK RFRWG’s transition milestones, which require the makes the necessary changes to the facility terms. The use of the RRSA is likely
transition of legacy contracts where viable, or if not, the adoption of robust to be driven by the Agent in most cases. Borrowers should discuss the most
fallbacks, during Q2 and Q3 2021. This approach is endorsed by the appropriate route with their lead banks and advisers.
regulators in the Dear CEO letter of 26 March, in the passage quoted above.
• Will the required consents be forthcoming? Lenders and borrowers will
It would seem therefore that there is flexibility to amend legacy LIBOR loans be equally incentivised to transition to RFRs with minimal fuss in many
to incorporate rate switch mechanisms rather than moving directly to RFRs circumstances. However, there will be a sub-category of “tough” legacy
in appropriate cases. This is sensible. The absence of this flexibility would give syndicated loans that cannot be amended to adopt replacement rates in time.
rise to a risk of foot-dragging in response to lenders’ amendment requests This might be due to lenders failing to respond to consent requests meaning
and a bottleneck of amendment transactions at year end, which would not be that the requisite majority cannot be obtained. There could also be cases
in the interests of lenders or borrowers. The flexibility to use a rate switch where lenders see an opportunity to withhold consent in exchange for a
may be particularly useful, in relation to USD loans where the transition more favourable outcome or other changes to the agreement. Regulated
timetable for legacy deals is longer due to the continuing availability of most lenders are disincentivised from exploiting the situation for economic
USD LIBOR tenors through to June 2023 (see section 2.4 above). advantage by the risk of sanction from regulators. However, not all investors
in syndicated loans are regulated. There have been some reports of investors
• Process for amendment (syndicated deals)? Will the agreement simply be refusing to give consent to transition in the LIBOR-linked FRN market for
amended and restated via an amendment agreement signed by all parties in the these sorts of reasons.
normal way, or, for syndicated deals, should the LMA’s two-stage approach
documented in its Reference Rate Selection Agreement (RRSA, still currently If there is a risk that the required consents will not be obtained, the
in exposure draft form) be adopted? An amendment agreement detailing the borrower will need to consider the consequences in conjunction with its lead
amendments required to implement RFR terms may be appropriate for banks and advisers. It is possible that some tough legacy loans will fall within
bilateral loans and club deals. For syndicated loans, amendments will require the scope of “synthetic LIBOR” (see section 2 above), but the scope and
the approval of the whole syndicate or a specified majority, depending on the economic implications of the UK legislative solution, at this point, remain
terms of the loan. Where the required consents may be challenging to achieve unclear. Borrowers who are concerned about a forthcoming consent process,
(for example, because of the size of the syndicate), the LMA’s RRSA may be or whose syndicated debt is widely held, are urged to liaise with their lead
helpful. The RRSA provides for a two-stage amendment process. All of the banks and advisers as soon as possible so they have a full understanding of
parties to the facility (or in the case of the lenders, the requisite majority) their options. For example, while we are not aware of any consent requests
agree to the key commercial terms via a “tick-box” checklist agreement that relating to LIBOR transition amendments that have involved incentive fees,
cross refers to the relevant LMA RFR Template. The parties to the agreement that could be an option that is necessary in some cases.
go on to delegate authority to the Agent and the borrower to implement the
3. Replacement rates
3.1 Rate options relevant RFR compounded in arrears. The UK RFRWG’s recommendation for
sterling loans is that, in the majority of cases, LIBOR should be replaced by
The FSB recommended that the focus of LIBOR transition efforts should be on SONIA compounded in arrears.
replacing LIBOR with the relevant RFR. The first task of all of the national
Working Groups was to identify an appropriate RFR. Some of the RFRs chosen “Overnight SONIA, compounded in arrears, will and should become the norm in
by the Working Groups are well-established rates that have been reformed most derivatives, bonds, and bilateral and syndicated loan markets given the benefits
more recently, for example, the sterling RFR, SONIA. Others, such as SOFR of the consistent use of benchmarks across markets and the robust nature of overnight
(the USD RFR) and €STR (the euro RFR), are new. The RFR for each LIBOR SONIA. The future use of a forward-looking term rate in cash markets should be
currency is set out in the table on the next page, together with the current more limited than the current use of LIBOR. So, where possible, counterparties
IBOR options, details of the national Working Group and links to sources of are encouraged to transition to overnight SONIA compounded in arrears.”
further information on the composition and operation of the relevant rate.
REPORT OF THE UK RFRWG USE CASE TASK FORCE
The RFRs’ common characteristic is that they are all backward-looking
overnight rates on a pool of virtually risk-free investments. Otherwise, they
have differing characteristics that reflect the most appropriate underlying local The Working Groups have, however, recognised that compounded in arrears
market. RFRs are also quite different from LIBOR. LIBOR includes a measure of RFRs are not the only alternative to LIBOR. Some products have been
bank credit risk and, as a term rate available over a range of maturities, a term highlighted as unsuited to RFRs compounded in arrears, for example smaller
liquidity premium. It is calculated on a consistent basis across all five currencies. business lending, trade finance and Islamic finance. For these products, there is
None of these elements are present in the RFRs. a potential use case for a forward-looking term rate derived from the relevant
RFR (see section 3 below). Other alternatives to compounded in arrears RFRs
The differences between LIBOR and RFRs prompted much concern in the early include historic compounded averages, central bank rates and fixed rates. These
stages of the LIBOR transition process, especially in the loan market, and there alternatives, having the advantage of being simpler to understand and administer,
was a strong desire for forward-looking term rates derived from RFRs. may be preferred in the bilateral SME sector of the loan market.
The priority of the Working Groups has, however, been to promote the use of Acknowledging that forward-looking term rates derived from RFRs might be
compounded (or averaged) RFRs, to align the cash markets with the derivatives relevant to certain sectors of the loan market, the LMA has produced a briefing
market. SONIA compounded in arrears, for example, has been used in the note setting out the considerations to be taken into account if such rates are to be
sterling overnight interest rate swap market for over 20 years, so conventions adopted, for example, what the appropriate fallbacks for such rates might be. For
are well established. The more gradual transition to RFRs in the loan market syndicated loans and larger bilateral loans, however, compounded in arrears RFRs
(compared to other products) reflects the time it has taken to overcome the will certainly be the norm. Compounded in arrears RFRs are therefore the only
operational hurdles to using backward-looking rates in the context of a IBOR alternatives included in the LMA RFR Templates. Section 4 below outlines
product built around forward-looking LIBOR. how the compounded in arrears rate is calculated and the conventions applicable to
For loans, the replacement rate for LIBOR in most cases will, therefore, be the RFRs compounded in arrears in the context of loans.
Risk free rates and working groups
LIBOR IBOR/ RFR RFR Working

Currency Administrator Administrator Group
LIBOR Sterling Overnight Bank of England Working Group on Sterling

IBA Index Average (SONIA) Risk-free Reference Rates
LIBOR Secured Overnight Federal Reserve Bank Alternative Reference

IBA Financing Rate (SOFR) of New York (NY FED) Rates Committee (ARRC)
LIBOR Euro Short-term European Central Bank (ECB) Working Group

IBA Rate (€STR) on Euro Risk-free Rates
EURIBOR
EMMI
LIBOR Swiss Average Rate SIX Swiss Exchange National Working Group (NWG)
IBA Overnight (SARON) on Swiss Franc Reference Rates
LIBOR Tokyo Overnight Bank of Japan Cross-industry Committee

IBA Average Rate (TONAR) on Japanese Yen Interest
Rate Benchmarks
TIBOR
Euroyen TIBOR
JBATA
3.2 EURIBOR 3.3 Term SONIA
Euro LIBOR is not widely used in the loan market. The exception is in euro As noted above, the UK RFRWG has made clear that it expects SONIA
swingline facilities, which may use the overnight euro LIBOR rate or EONIA, compounded in arrears to become the norm for most of the sterling loan
which is also being discontinued on 3 January 2022. These facilities are being market, with use of a term SONIA reference rate being significantly more
transitioned to €STR. limited. In its January 2020 paper “Use Cases of Benchmark Rates: Compounded
in Arrears, Term Rate and Further Alternatives”, it did, however, acknowledge
Treasurers will be aware that the EU authorities decided some time ago to term SONIA as an appropriate option in the limited instances where operational
reform, rather than discontinue, EURIBOR. There is currently therefore no need necessity precludes the use of a compounded in arrears RFR or another
to transition euro facilities from EURIBOR to €STR, although equally, it should be alternative rate. Transactions for smaller corporate, wealth and retail clients for
possible to price loans based on compounded in arrears €STR, if preferred. whom simplicity and/or payment certainty is a key factor are an example. In
Whether to transition euro facilities to €STR along the same timeline as addition, there are some products where the use of SONIA compounded in
transitioning LIBOR loans to RFRs is a decision for the parties to take on a case arrears will likely create operational difficulty regardless of the sophistication of
by case basis. As the loan market becomes more familiar with using RFRs, it may the borrower. These include trade and working capital products such as supply
be that the euro market moves to €STR. To date, we have observed limited chain finance and receivable facilities, export finance and emerging market loans,
appetite on the lender and the borrower side for €STR compounded in arrears. and Islamic facilities. In such cases, although fixed rates or the Bank of England’s
Our expectation is that the €STR market will develop over a longer timeframe. Bank Rate may be used, there may be instances where a forward-looking term
rate is the most appropriate alternative to LIBOR.
The current focus of the Working Group on Euro Risk-Free Rates (the Euro
Working Group) is on identifying €STR-based fallbacks for EURIBOR, to cater Given there are use cases for term SONIA, albeit limited, three benchmark
for a future scenario in which EURIBOR may permanently cease. The publication administrators (Refinitiv, ICE Benchmark Administration and FTSE Russell) were
of recommendations for €STR-based fallbacks for EURIBOR loans are mandated to begin publishing term SONIA reference rates (TSRR) in “beta”
anticipated shortly. Once the final recommendations are available, we expect form in summer 2020, for information and testing purposes. The UK RFRWG
the LMA RFR Templates that include euro facilities to be updated to incorporate does not intend to endorse a particular TSRR. To assist market participants
the recommended fallback provisions. Until then, the parties will need to with understanding the differences between the rates, it has, however, produced
consider the most appropriate fallbacks for EURIBOR. a summary of the key attributes of the beta versions.
The LMA RFR Templates make provision for the switch of euro loans from The “beta” status of the TSRRs produced by Refinitiv and ICE Benchmark
EURIBOR to €STR after the date of the agreement, to cater for a future Administration was removed in January 2021 (and the UK RFRWG’s summary
scenario in which EURIBOR may cease permanently. See further section 4 and of key attributes was updated accordingly)4. These rates are now live and
section 8 of Part II. available for use. Both administrators are publishing 1-month, 3-month, 6-month
4
The FTSE Russell rate has been discontinued.
and 12-month tenors and all are based on a “waterfall methodology’, although The inclusion of term SOFR in the fallbacks waterfall suggests that the ARRC’s
there are methodological differences between them meaning that the final rates use cases for term SOFR may be less restrictive than that of the UK RFRWG.
are marginally different. If this is the case it will be largely to accommodate the needs of the US domestic
market. The ARRC has, however, recently stated that a limited scope of use of a
The Fixed Income, Currencies and Commodities Market Standards Board is in term SOFR reference rate is an important condition to help ensure that such a
the process of developing a proposed market standard for limiting use of the term rate does not reintroduce the vulnerabilities that first prompted the
TSRRs. A draft of the standard was published for consultation on 24 March transition away from LIBOR. It is not therefore, immediately clear how much
2021. It is open for comments until 28 May 2021, with the final document more permissive use of a term SOFR reference rate will be and in light of the
expected to be published shortly after. The draft standard emphasises the need recently announced delay to the availability of a term SOFR rate and the
for a “robust rationale” for the use of the TSRR in lending products, and the indications of a limited use case, the ARRC is encouraging market participants to
inclusion of “robust fallbacks” within TSRR-referencing products, to apply transition without reliance on a term rate. While some USD borrowers would
should the TSRR be discontinued or lose representativeness. ideally wish to have the opportunity to assess any term SOFR rate before
3.4 Term SOFR moving straight to SOFR compounded in arrears, the ARRC’s recent
announcements may dampen the willingness of lenders to write new USD
The ARRC released a request for proposals seeking a potential administrator to LIBOR deals in the meantime (see section 2 above).
publish a forward-looking term SOFR reference rate in September 2020, but has
not yet made a selection and no indicative rate is yet available. The intention was The availability of a term SOFR reference rate (whenever this may be) may not,
initially to make a term SOFR reference rate available by the end of Q2 2021, in any event, have much impact on London-originated loans in USD, which may
provided liquidity in SOFR derivatives was sufficiently developed. The ARRC has continue to reference SOFR compounded in arrears as has been the case so far.
since confirmed that it will not be in a position to recommend a term SOFR
reference rate by mid-2021 given the current level of liquidity in SOFR
derivatives markets, and has further stated that it cannot guarantee that it will
be in such a position by the end of the year.
The ARRC has not yet set out its recommended use cases for a term SOFR
reference rate either, although it is currently evaluating options. It is notable
that the ARRC’s recommended SOFR-based fallbacks for USD loans (both the
bilateral and syndicated versions) include term SOFR (if available) as the first
stage in the fallback waterfall. This contrasts with the LMA/English law position,
which is to transition straight to the relevant RFR compounded in arrears (see
section 7 below).
3.5 Other term RFRs
Of the other LIBOR currencies, term RFRs are anticipated for JPY and most
likely euro, but not for CHF:
• CHF: The National Working Group on Swiss Franc Reference Rates (the
Swiss Working Group) has concluded it is not possible to produce a term
SARON rate as the underlying data required to produce such a rate is
not available.
• JPY: QUICK Corp commenced publication of a prototype term TONAR
(the Tokyo Term RFR or “TORF”) in May 2020. It is anticipated to be
published in usable form in mid-2021.
• Euro: The Euro Working Group is progressing term €STR rates with a
number of administrators (IBA/EMMI, Refinitiv and FTSE Russell) and has
consulted on use cases in the context of its consultation on €STR based
fallbacks for EURIBOR. Term €STR may progress along a longer timeline
than term SONIA, term SOFR and term TONAR for the reasons discussed
in section 3.2 above.
Please refer to the national Working Group webpages listed in the table in
section 3.1 above for further information on the availability and use cases for
term RFRs in these currencies.
4. Conventions for referencing RFRs compounded in arrears in loans
4.1 UK RFRWG recommendations 4.2 Compounding calculation
The options for calculating SONIA compounded in arrears were analysed by the Compounding recognises that the borrower does not pay back interest owed on a
UK RFRWG and market participants in some detail during 2020, culminating in daily basis. Compared to simple averaging, it more accurately reflects the time value
the publication of the UK RFRWG’s Recommendations for SONIA Loan Market of money by keeping track of the accumulated interest owed but not yet paid.
Conventions (the Sterling Loan Conventions) in September 2020. These
conventions are further explained in the UK RFRWG’s Best Practice Guide for There are different approaches that can be taken to the compounding
GBP Loans, which was updated in March 2021 and includes links to the key UK calculation. The additional amount of interest owed each day can be calculated
RFRWG documentation for loan market participants, including Supporting Slides either by applying the daily RFR to the balance of the loan or to the rate itself:
and worked examples of the application of the conventions. • Compounding the balance: The daily RFR is multiplied by the outstanding
In summary, the Sterling Loan Conventions recommend the use of a non- principal and unpaid accrued interest (collectively, the balance).
cumulative compounded daily SONIA rate for loans, with a five banking day • Compounding the rate: The rate itself is compounded and multiplied by the
lookback period and no observation shift (although an observation shift is also a outstanding principal.
valid option). These conventions are reflected in the LMA RFR Templates and
are being incorporated into the loan market infrastructure that will facilitate the If the second option is chosen, there are two approaches to compounding
adoption of RFRs on a market-wide basis. the rate:
The remainder of this section 4 outlines the key components of the Sterling • Cumulative compounded rate (CCR): The compounded rate is calculated
Loan Conventions. How those conventions translate into the LMA RFR at the end of the interest period and that rate is then applied to the whole
Templates is discussed in Part II. period. This method allows interest for the whole period to be calculated
using a single compounded rate.
It is important to be aware that the Sterling Loan Conventions differ in some
respects to the conventions applicable to the use of SONIA compounded in • Non-cumulative compounded rate (NCCR): This rate is derived from the
arrears in other products such as bonds and, importantly, derivatives. There are CCR. The NCCR for a given day is the CCR for that day minus the CCR for
differences between the recommended loan conventions and the conventions the previous day. This generates a daily compounded rate which allows the
applicable under ISDA’s IBOR fallbacks documentation. There are also calculation of a daily interest amount. These daily interest amounts are added
differences between the Sterling Loan Conventions and those conventions up to provide a rate over the required period, enabling accurate calculation of
recommended by other of the Working Groups for loans. These differences are accrued interest at any point in time.
discussed further in section 4.6 below.
The Sterling Loan Conventions recommend the NCCR method for loans
because it better supports intra-period events such as prepayments and trading.
This is reflected in the compounding formulae that appear in the LMA RFR
Templates, see section 3 of Part II. A CCR may be appropriate for certain loans,
see further section 3.1 of Part II.
A CCR has been adopted by ISDA for the purposes of IBOR fallbacks in
derivatives and is also being used in capital markets products.
4.3 Lookback period
RFRs are backward-looking overnight rates, so the daily RFR will be available 4.4 Observation shift
only at the end of the day to which it relates or the beginning of the next day. If
the interest payable for a given interest period is calculated based on the RFRs When compounding a rate over a period, the rate applied on days on which the
observed each day during the interest period, the total interest payable will only rate is not published (for example, weekends and bank holidays) will be the rate
be known with precision at the end of that interest period or just after. for the preceding business day. The rate is not compounded on the non-business
day. Instead, the RFR for the preceding business day is weighted more than once
This presents a challenge. The parties to a loan facility will need to determine in the compounding calculation. The RFR for a Friday, for example, when the
the amount of interest payable some period in advance of the end of the interest next business day is the following Monday, will have a weighting of three days in
period if they are to mobilise payments within the required settlement time. The the compounding calculation to account for the fact that it is used for the Friday,
solution that has been developed to deal with this is known as the “lookback”. Saturday and Sunday.
The lookback involves observing the RFRs each day over an “observation If the lookback convention is adopted such that interest is calculated over an
period” which starts and ends a certain number of days prior to the start and observation period that is different from the interest period, there is a question
the end of the interest period. Interest is payable on the basis of the rates as to how the weighting is derived - namely, whether to adopt the “observation
compounded over the observation period, meaning interest payable will be shift” convention or not.
determinable before the end of the interest period.
The observation shift convention (“shift” or “lookback with observation
The Sterling Loan Conventions recommend a five banking day lookback period shift”) weights the rate according to the number of calendar days in the
for loans referencing SONIA compounded in arrears, although both the observation period rather than the number of calendar days in the interest
conventions and the LMA RFR Templates recognise that there may be instances period. In other words, the daily rates are rated according to where they fall in
where a shorter or longer lookback period is necessary or desirable. See the observation period rather than the interest period. The lookback without
section 3.2 of Part II.
observation shift convention (also known as “observation lag”) weights the rate 4.6 Recommendations of other national Working Groups
according to the number of calendar days in the interest period to which the
calculation is relevant. The two approaches are best illustrated by example. The ARRC, the Swiss Working Group and the Cross-Industry Committee on
The UK RFRWG’s Supporting Slides containing the detailed loan conventions Japanese Yen Interest Rate Benchmarks have published conventions for
are helpful here. referencing SOFR, SARON and TONAR, respectively. Conventions for
referencing €STR remain the subject of consultation.
The concept of an observation shift is used in the SONIA Compounded Index
and the SOFR Compounded Index (discussed in section 5 below) and in RFR- The differences between the headline conventions by currency are set out in the
linked derivatives. The Sterling Loan Conventions, on the other hand, table overleaf. The table also notes, for comparison purposes, the conventions
recommend the adoption of a five banking day lookback without observation used for compounding RFRs in the derivatives market and reflected in the ISDA
shift as the preferred option for sterling loans. The Sterling Loan Conventions IBOR fallbacks (discussed further in section 8 below):
do, however, recognise that a lookback with observation shift can be a viable It is worth noting that the ARRC has put more focus on simple interest as an
and robust alternative. The observation shift might be required, for example, to option for the US loan market, whereby the daily SOFR rate is multiplied by the
align payments of interest under the loan with related hedging. Accordingly, LMA outstanding principal of the loan. This appears to be due to simple interest being
RFR Templates exist for both options. See further section 3.3 of Part II. operationally easier to implement. As is apparent from the table overleaf,
4.5 Interest rate floors different approaches are also being taken by the national Working Groups in
respect of the observation shift convention, although a number recognise that
It is fairly common in the loan market for reference rates to be floored at zero. the alternative approach to that recommended remains a viable option in certain
In some sectors of the market, positive floors may apply. The Sterling Loan circumstances. Recommendations for a lookback with observation shift seem to
Conventions recommend that, where a floor applies, it is calculated daily rather be based on the fact that this approach is consistent with that being taken by
than at the end of an interest period. In other words, the applicable interest rate ISDA to fallbacks for derivatives as well as other cash products in the relevant
floor is applied to each daily RFR before compounding. This is necessary because currency. The recommendation of the UK RFRWG for a lookback without
loans accrue interest daily. observation shift in the loans context was driven in part by a preference for
consistency with the US recommendations for loans.
The Sterling Loan Conventions also recommend, in relation to legacy contracts,
that if the aggregate of SONIA and any credit adjustment spread (CAS, see section
6 below) is less than the applicable floor, in the compounding calculation, the
SONIA rate (rather than the CAS) is adjusted to ensure that the aggregate of the
SONIA rate and the CAS is floored at the applicable rate (eg zero). However, they
also recognise that some may prefer to adjust the CAS instead. The LMA RFR
Templates take the former approach. See further section 3.6 of Part II.
Summary of key conventions
Source RFR Observation shift Lookback Floors
Sterling Loan SONIA compounded

Sterling No (or shift if preferred) 5 banking days Daily floor
Conventions in arrears
SOFR syndicated
loan conventions Simple daily SOFR or
USD SOFR compounded No No recommendation Daily floor
SOFR bilateral in arrears
loan conventions
Consultation on €STR compounded in Apply floor at end of

Yes (or no shift
Euro €STR-based fallbacks arrears (or simple daily No recommendation period (or daily floor
if preferred)
for EURIBOR loans €STR if preferred) if preferred)
Minutes of 29.09.20 Apply floor at end of

SARON compounded Yes (or no shift
CHF meeting of Swiss 5 Business Days period (or daily floor
in arrears if preferred)
Working Group if preferred)
TONA (Fixing in TONAR compounded in

JPY arrears) conventions arrears (or simple daily No (or shift if preferred) 5 Business Days
for loans TONAR if preferred)
ISDA IBOR RFR compounded

ISDA IBOR Fallbacks Yes 2 banking days
Fallbacks in arrears
5. Data sources
The accessibility of RFRs has been a concern for many treasurers. There is no compounded averages for intra-group loans. The Bank of England consulted in
definitive “screen rate” source of compounded in arrears RFRs. In most RFR- early 2020 on whether to produce SONIA period averages (compounded
linked products, rather than identifying the rate by reference to a screen page, SONIA rates calculated over a series of set time periods) and, if so, whether
the rate calculation formulae and conventions will need to be documented and there was market consensus on the relevant time periods. The conclusion, at
calculations effected based on the agreement. that point, was not to produce averages given a lack of consensus on their utility
and choice of methodologies.
The production of a screen rate is challenging because the calculation of a RFR
compounded in arrears requires a SONIA rate for each day in the period. The The indices are a helpful shortcut, but only if the indices are calculated in
Bank of England has developed a SONIA Compounded Index to assist with a manner that is consistent with the desired conventions for the use of
calculations. This is a series of daily data that represents the returns from a compounded RFRs. The use of an index is not possible, for example, if the
rolling unit of investment earning compounded interest at the SONIA rate each NCCR method of compounding is adopted. Further, the SONIA Compounded
day. The change in the index between any two dates can be used to derive a Index adopts the observation shift convention; if that is not adopted, the index
compounded SONIA rate for a chosen period. The manner in which the SONIA will not be suitable. The use of benchmark floors (discussed further in section
Compounded Index is calculated is described on the Bank of England’s SONIA 3.6 of Part II), which are common in the loan market, also inhibit the use of the
Key Features and Policies webpage. indices if rates are negative as floors are not built into the current calculation
methodology. Accordingly, the LMA RFR Templates, which reflect the Sterling
The New York Fed has similarly developed an Index for Compounded SOFR. The Loan Conventions, do not contemplate the use of any compounded RFR index.
Fed also publishes 30 day, 90 day and 180 day compounded SOFR averages. While
there are no current plans to discontinue EURIBOR, the European Central Bank Certain private sector providers are developing compounded RFR indices that
has recently announced that it will start to publish average compounded €STR are compatible with loan market conventions for referencing compounded in
rates (1 week, 1 month, 3 months, 6 months and 12 months) and a compounded arrears RFRs. For example, ICE Benchmark Administration Limited launched,
index based on €STR from 15 April 2021. SARON compounded rates for defined in March 2021, its own set of ICE SONIA Indexes, currently in ‘beta’ form for
periods are also being published by SIX Swiss Exchange. information and testing purposes. These indices, ten in total, operate in a similar
way to the Bank of England’s SONIA Compounded Index, but seek to support
The compounded average rates for defined periods are based on historic data. the varying needs of the sterling lending market by providing optionality in terms
In other words, the rates, when published, are for a period just ended. They may of the use of an observation shift or not, the length of the lookback period (if
nonetheless be useful for certain purposes where rates over fixed periods can any) and the incorporation of a zero floor. The fact that the indices address a
be used. The ARRC, for example, has recommended the use of the SOFR
range of different conventions, in theory, makes them much better suited to use
across the sterling loan market. It remains to be seen, however, once the testing
phase is complete (expected to be later in April 2021), whether there is in fact
significant take up amongst market participants.
The advantage of the official sector indices and compounded averages, of course,
is that data is freely available. Potentially, therefore, these would be good
reference points for corporates for certain purposes, for example, intra-group
transactions, enabling a reduction in the calculations to be performed. The
availability of freely available indices, averages or rate calculators that are
compatible with loan market conventions would be a welcome development.
6. Credit adjustment spread (CAS)
6.1 Pricing of RFR loans Where there is no separate CAS, consideration will need to be given to the
impact of the increased Margin on other provisions of the facility agreement such
The move from LIBOR to RFRs is intended to be economically neutral. As as commitment fees and any margin ratchets. See further section 3.7 of Part II.
already noted, RFRs are, however, inherently different from LIBOR, in part
because RFRs are risk-free or nearly risk-free whereas LIBOR includes a credit 6.2 How is the CAS to be calculated?
risk premium. This means that there is an economic difference between the two
that needs to be accounted for. The UK RFRWG has recommended the use of a CAS based on the historic
median between LIBOR and the relevant RFR over a five-year lookback period
There are two ways of incorporating this economic difference into the pricing from an agreed date (the 5YHLB) for legacy cash products in conjunction with
of a loan: fallbacks ie. to apply in conjunction with SONIA compounded in arrears on the
cessation/pre-cessation of sterling LIBOR rates. This recommendation was
• Increase the Margin, so that the loan is priced at the compounded RFR + driven by a preference for consistency across products. The 5YHLB has also
increased Margin; or been selected by ISDA for the purposes of transitioning LIBOR derivatives to
• Maintain the LIBOR Margin and add a separate credit adjustment spread RFRs on cessation/pre-cessation (see section 6.3 below).
(CAS) to the interest calculation so that the loan is priced at the For new loans or loans that are being actively transitioned to SONIA ie.
compounded RFR + CAS + Margin. transitioned in advance of cessation/pre-cessation, two methods for calculating
Which option to use is, at this point, largely a presentational issue. During the the CAS have emerged: the 5YHLB and the “forward approach”. The forward
current transitional period, many RFR-linked facilities are adopting a separate approach is based on the forward-looking basis swap market. This involves using
CAS rather than incorporating the CAS amount into the Margin. This is also the forward-looking basis swaps to calculate the implied future spread between the
approach being used in legacy LIBOR deals as they are transitioned to RFRs. relevant RFR and LIBOR. It is calculated as the linear interpolation between
This is, at least in part, because this approach enables lenders to clearly differing tenors of LIBOR swaps and RFR swaps. The tenor of the basis used is
demonstrate to regulators how the costs of the transaction have been matched to the weighted average life of the loan.
calculated and that they are treating customers fairly. The FCA has emphasised The differences between the two approaches are explored in the UK RFRWG’s
that LIBOR transition should not be used to move customers to replacement December 2020 paper Credit adjustment spread methods for active transition
rates that are expected to be higher than what LIBOR would have been. As of GBP LIBOR referencing loans, which outlines the considerations to be taken
market practice develops in relation to loans referencing RFRs, building the into account and includes a number of worked examples.
economic difference between LIBOR and the relevant RFR into the Margin is
expected to become the more common approach. The LMA RFR Templates do not specify how any separate CAS, if included,
should be calculated, leaving the parties to draft for their preference.
See further section 3.7 of Part II.
6.3 Screen rate CAS 6.4 The US approach
ISDA has appointed Bloomberg Index Services Limited (BISL) to publish the In our experience, the calculation of the CAS applicable to actively transitioned
fallback rates and CAS for use in derivatives on the cessation/pre-cessation of loans in the London market is being approached as described above, regardless
LIBOR. Bloomberg began to publish the adjusted RFR (compounded in arrears), of currency. While predominantly applicable to the US domestic market,
the CAS (based on the 5YHLB) and the “all in” fallback rate (being the adjusted treasurers should be aware of how the ARRC is approaching this issue which,
RFR + CAS) for all LIBOR currencies and tenors, on an indicative basis, in July in some respects, is slightly different.
2020. On 5 March 2021, when the FCA announced the dates on which LIBOR
rates will cease or lose representativeness, the BISL CAS ceased to float and In April 2020, the ARRC published its recommendations for the CAS methodology
was fixed for all LIBOR currency-tenor pairs. The BISL CAS rates, fixed as of 5 for cash products, applicable on cessation/pre-cessation of the relevant USD LIBOR
March, are set out in Bloomberg’s technical announcement. rate. For USD LIBOR business (as opposed to consumer) loans, the recommended
CAS methodology is the ISDA 5YHLB formulation, so is the same in substance as
While the BISL rates, including the BISL CAS, are being made available for the the recommendation of the UK RFRWG. In June 2020, following a supplemental
purposes of ISDA’s IBOR fallbacks (see section 8 below), the UK RFRWG’s consultation, the ARRC published further details regarding its recommendation of
recommendation that the 5YHLB approach should be used to set the CAS in spread adjustments for cash products referencing USD LIBOR - firstly, that the
legacy cash products raises the question of whether the relevant BISL screen ARRC’s recommended spread adjustments for cash products (other than consumer
rates can be cross-referenced in loans. In January 2021, the UK RFRWG wrote products) would match the value of ISDA’s spread adjustments to USD LIBOR
to Bloomberg seeking to clarify the terms of access and use by cash market (rather than using the same methodology), and secondly, that for all cash products,
participants to the BISL all-in fallback rate and the fixed BISL CAS. Bloomberg in the event that a pre-cessation event is operative, the ARRC recommended spread
confirmed in its response that the BISL rates are available for use in contractual adjustments would be determined at the same time as ISDA’s spread adjustments,
fallbacks and/or active conversion in the sterling cash markets, and has provided namely at the time of any announcement that LIBOR will or has ceased or will or
further clarity on how users can access the data. Those who are not Bloomberg has become no longer representative.
Terminal or Enterprise Data subscribers may obtain the rate data from other
authorised re-distributors or via Bloomberg’s website on a delayed basis. The BISL CAS was fixed for all LIBOR currencies and tenors on 5 March 2021
following the FCA’s cessation/pre-cessation announcement (see section 3
Accordingly, the BISL CAS may be cross-referred to in loans as the applicable above). In line with its June 2020 recommendations, the ARRC’s recommended
CAS on pre-cessation/cessation (or indeed in loans being actively transitioned), CAS for USD cash products has also now been fixed at the same rates.
if it is agreed to adopt the 5YHLB. This is useful given the UK RFRWG has not
announced any plans to publish, or to appoint a third party to publish, a In March 2021, the ARRC announced that Refinitiv had been selected to publish
recommended 5YHLB spread for use in legacy sterling LIBOR products on the the ARRC’s recommended (and now fixed) spread adjustments, as well as
cessation or pre-cessation of sterling LIBOR. spread-adjusted rates, for use in cash products that contain the ARRC’s
hardwired fallbacks. These rates are to be made available on a daily basis to the
general public without cost. For USD legacy loans, there will therefore be a
screen rate CAS available, based on the 5YHLB.
7. The LMA RFR Templates
7.1 The LMA’s LIBOR transition resources • Multi-currency term and revolving facilities agreement referencing
compounded/term rates (the Compounded/Term MTR). A facility that
To support the transition of the syndicated loan market from LIBOR to can be drawn in sterling, USD, CHF and/or euro plus optional currencies.
compounded in arrears RFRs, the LMA has produced a substantial body of Sterling, USD and CHF drawings reference compounded in arrears RFRs.
facility templates, supplementary drafting and guidance materials, as well as a Euro drawings reference EURIBOR. The agreement makes provision for term
series of educational videos. While the LMA’s documentation library is rate drawings (eg in euro) to switch to compounded in arrears RFRs on a
accessible to LMA members only, many of the webinar and educational materials pre-agreed date or on the occurrence of specified trigger events.
are open to all on the LMA’s LIBOR transition microsite.
There are six LMA RFR Templates in total as there are two versions of each of the
As noted in the introduction, the commentary in Part II of this Guide has been above templates. The first uses a compounding formula that includes a lookback
prepared on the assumption that most corporates reading this Guide will not be without observation shift, the approach recommended in the Sterling Loan
LMA members and so will not have access to the LMA documentation library. Conventions. The other uses a compounding formula that includes a lookback
Treasurers may, however, find it helpful to review this Guide alongside a copy of with observation shift. The two versions of each template are identical save for
the relevant terms, to properly familiarise themselves with the LMA RFR the mathematical compounding formulae in the last two schedules, which differ
Templates. The LMA’s RFR documentation can be provided to non-members slightly to accommodate the approach taken to the observation shift convention.
(for example, by legal advisers or relationship banks) in the course of a See section 4.4 above in relation to the observation shift convention.
transaction. Some borrowers have joined the LMA, providing them with direct
access to LMA documentation and guidance on LIBOR transition. Further The LMA has also produced commentaries and termsheets relating to the LMA
information on LMA membership is available on the LMA website. RFR Templates.
7.2 Recommended forms of facility agreement for RFR-linked loans 7.3 Next steps
The LMA RFR Templates published on 30 March 2021 comprise the following: The only document that forms part of the LMA’s drafting for RFR-linked facilities
that still remains in Exposure Draft form is the RRSA (see section 2.6 above) for
• Single currency term and revolving facilities agreement referencing legacy LIBOR transactions.
either SONIA or SOFR (the Single Currency MTR). A single currency
facility referencing SONIA or SOFR compounded in arrears. The LMA’s broader documentation library will be updated to reflect the RFR terms in
the LMA RFR Templates in due course. This includes its suite of documentation for
• Multi-currency term and revolving facilities agreement incorporating rate investment grade lending, real estate lending, leveraged lending and so on. This is a
switch provisions (the Rate Switch MTR). A facility that can be drawn in significant undertaking which is anticipated to be rolled out in stages. In the meantime,
sterling, USD, CHF and/or euro plus optional currencies. Sterling, USD and CHF market participants will need to use the relevant LIBOR-referencing template in
drawings reference LIBOR. Euro drawings reference EURIBOR. The agreement conjunction with the RFR terms extracted from the LMA RFR Templates. The LMA
makes provision for all drawings to switch to compounded in arrears RFRs on a has produced some guidance notes outlining the considerations to be taken into
pre-agreed date or on the occurrence of specified trigger events. account that will be helpful to members in the meantime.
8. Hedging considerations
8.1 Active transition or transition by way of fallback is actively transitioned and derivatives are instead transitioned in due course
according to ISDA’s IBOR fallbacks (discussed at section 8.2 below).
While detailed guidance on derivatives is outside the scope of this Guide, many
treasurers thinking about new RFR-linked loans or the amendment of legacy The implications of any differences between the compounded RFR conventions
LIBOR loans will also need to think about the transition of related LIBOR hedging. used in the loan and in related derivatives also requires attention. In summary, the
The key decision is whether LIBOR hedging should transition to RFRs by conventions applicable to RFR-linked derivatives have been broadly, but not
incorporating fallbacks to RFRs - or whether hedging arrangements should entirely, consistent with the conventions being adopted in the loan markets. For
transition to RFRs in advance of the cessation/pre-cessation of relevant LIBOR example, SONIA derivatives currently use the observation shift and a two banking
rates. If it is determined that hedging arrangements should be actively transitioned day lookback, as noted in the table in section 3 above, whereas the Sterling Loan
to RFRs alongside the loan, conversations with hedging providers should be Conventions recommend a five banking day lookback without observation shift
initiated at an early stage, with a view to assessing alignment options and pricing. for sterling loans. The differences may not necessarily lead to the conclusion that
Liquidity in SONIA derivatives is relatively deep; in other currencies, notably the ISDA IBOR fallbacks (for example) are unsuitable for derivatives hedging loans.
SOFR, it is still developing. The scope of any basis risk arising out of the cash product fallbacks and the ISDA
fallbacks not being exactly matched (either in terms of applicable RFRs or in terms
Transition to RFRs by way of fallback will in most cases be achieved using ISDA’s of the timing of application) – and whether that basis risk is sufficiently material to
IBOR fallbacks documentation. The key features of ISDA’s IBOR fallbacks are warrant deviation from the ISDA Supplement/ISDA Protocol terms - is a point to
outlined in section 8.2 below, but the key point to note is that the standard be explored with counterparties and debt advisers.
position is that LIBOR derivatives will continue to reference LIBOR until the
relevant LIBOR currency/tenor pair either ceases or loses representativeness It is worth noting that ISDA is working on new “rate options” for daily RFRs
(pre-cessation). The active transition of LIBOR derivatives to RFRs prior to (new overnight Floating Rate Options) together with new modular provisions
cessation/pre-cessation is achieved by entering into new contracts linked to a providing a menu of approaches to average and compounded RFRs, including the
non-LIBOR rate. It is also possible, although slightly more complex, to amend/ length of the lookback and the application of daily caps and floors. These new
replace existing LIBOR linked swaps such that a non-LIBOR rate is referenced provisions include options designed to be compatible with the LMA RFR Terms
from the point of amendment/replacement. and will provide a standardised approach for transactions where close alignment
between the terms of the derivative and the hedged item is desirable. The new
Whether it is imperative to transition LIBOR hedging arrangements at the same ISDA provisions are in near final form at the time of writing. They will be
time as the corporate’s LIBOR loans switch to RFRs will depend on how closely published as a Supplement to the 2006 ISDA Definitions and will also be
the hedging and the hedged item need to be aligned. A need for alignment in included in the upcoming 2021 ISDA Definitions (due to be published mid-May
terms of timing may be driven by contractual hedging requirements set by 2021 for implementation by the end of Q3).
lenders, hedge accounting considerations or perceptions of basis risk if the loan
8.2 The ISDA IBOR Fallbacks The ISDA Protocol is aimed at legacy LIBOR transactions ie. pre-existing LIBOR
transactions entered into prior to 25 January 2021 (although there are some
ISDA’s IBOR Fallbacks Supplement (the ISDA Supplement) and Protocol (the limited circumstances in which it can apply to new transactions). When two
ISDA Protocol) were published in October 2020 and became effective on 25 parties have adhered to the ISDA Protocol, all IBOR-referencing transactions
January 2021. The ISDA Supplement and the ISDA Protocol (together the ISDA existing between them are automatically amended to incorporate the non-LIBOR
IBOR Fallbacks) are primarily designed to facilitate the transition of derivatives fallbacks. The ISDA Protocol applies not only to transactions governed by the
from LIBOR by substituting applicable LIBOR rates with new non-LIBOR fallbacks. 2006 ISDA Definitions but also the 2000 ISDA Definitions, amongst others. The
The fallback rates that replace LIBOR under the ISDA Supplement and the ISDA ISDA Protocol can even apply to certain non-ISDA documents.
Protocol comprise the relevant RFR compounded in arrears, plus a CAS The effective date of 25 January 2021 is simply the date on which the
calculated based on the 5YHLB basis. As discussed in section 6.3 above, the amendments effected by the ISDA Protocol will take effect in transactions
compounded RFRs, CAS and all-in fallback rates are being published by BISL. between parties that have chosen to adhere to it. 25 January is not a cut-off
Both the ISDA Supplement and the ISDA Protocol replace the relevant LIBOR date for adherence. The terms of the ISDA Protocol will become effective to
with these fallbacks built from RFRs on the permanent cessation of the relevant amend existing trades at the point both adherents have adhered to it, even if
LIBOR. The non-LIBOR fallbacks may also be applied if the relevant LIBOR that happens after 25 January. ISDA has indicated that it will give notice if the
ceases to be representative of the underlying market it is intended to measure ISDA Protocol becomes subject to a cut-off date.
(the so-called “pre-cessation trigger”, and the subject of the FCA announcement The ISDA Supplement, on the other hand, is aimed at LIBOR transactions
on 5 March 2021, see section 2 above). Note that if only certain LIBOR rates are entered into from 25 January 2021 (the effective date of the ISDA Supplement).
discontinued for a particular currency, the fallbacks will not be triggered and the The ISDA Supplement amends the 2006 ISDA Definitions to incorporate the
continuing LIBOR rates will be interpolated. This is important to bear in mind in new non-LIBOR fallbacks. This means that any derivatives contracts entered
the context of USD LIBOR facilities (see section 2.4 above). into after 25 January 2021 which, according to their terms, incorporate the
The ISDA Supplement and the ISDA Protocol contain the same fallbacks. They 2006 ISDA Definitions, will incorporate the non-LIBOR fallbacks without
are, in essence, two methods of achieving the same outcome. The difference is further action. The ISDA Supplement will not apply to derivatives that do not
in their scope ie. the trades which they are designed to apply to. incorporate the 2006 ISDA Definitions, although it is relatively unusual for that
to be the case in the context of corporate interest rate hedging.
9. Beyond LIBOR
The FSB’s recommendations for benchmark rate reform in 2014 extended
beyond LIBOR to all major interest rate benchmarks. Jurisdictions beyond the
five LIBOR currency jurisdictions are therefore engaged in their own benchmark
reform exercises to implement the FSB recommendations.
While the benchmark reform project in each jurisdiction has the same ultimate
aim of strengthening existing benchmarks and promoting the development and
adoption of RFRs where appropriate, the precise approach being taken differs
quite significantly between jurisdictions, as do the timetables for reform. There
are jurisdictions for example, such as Canada, which are adopting a multiple rate
approach, promoting a new or reformed RFR alongside maintaining and
strengthening an existing IBOR. Others, where the markets that underpin the
relevant IBOR have become too thin to support a robust IBOR, are adopting an
approach akin to that being taken to LIBOR, replacing the existing IBOR with a
new or existing RFR.
The FSB’s 2020 progress report on reforming major interest rate benchmarks
provides a helpful summary of the status of benchmark reform in a number of
non-LIBOR currency jurisdictions and may be of interest to those treasurers
with borrowings in non-LIBOR currencies. Users of non-LIBOR rates should
refer to regulatory and working group resources in the relevant jurisdiction for
fuller information on rate options for specific currencies.
While the LMA RFR Templates do not specifically cater for benchmarks beyond
the RFRs replacing LIBOR and EURIBOR, they do provide a framework which
can be adapted for the specific currency and benchmark in question, and
therefore remain a useful starting point.
Summary Timeline
By end Q2 2021 31 December 2021
(Further) clarity on Cessation of most
legislative solutions for LIBOR rates
“tough” legacy contracts
including synthetic LIBOR? No new USD
End Q3 2021 LIBOR business (US
5 March 2021 No new USD LIBOR authorities/FCA/PRA)
11 January 2021 business (ARRC) Target date for
FCA pre-cessation/ completion of “active 3 January 2022
Launch of SONIA cessation Publication of recommended conversion” of legacy
Term Rates announcement fallbacks for EURIBOR sterling LIBOR loans Cessation of EONIA
2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021/2 2023
25 January 2021 30 March 2021 From Q2 2021 By 30 June 2021 30 June 2023
Effective date for Publication No new TONA Term Rate Cessation of
ISDA IBOR fallbacks of LMA RFR sterling LIBOR (anticipated) remaining USD
Templates business LIBOR tenors
From Q3 2021
No new JPY or CHF
LIBOR business
PART II – COMMENTARY ON THE RFR TERMS IN THE
COMPOUNDED/TERM MTR
1. Introduction
The Compounded/Term MTR is based on the LMA recommended form of multi-currency term
and revolving facilities agreement (IBOR MTR). It makes provision for facilities that can be drawn
in sterling, USD, euro and/or CHF, alongside a framework for drawings in optional currencies.
The key difference between the Compounded/Term MTR and the pre-existing IBOR MTR is
that the former includes a framework for the use of forward-looking IBORs for certain
currencies (Term Rate Currencies) and RFRs compounded in arrears for others
(Compounded Rate Currencies). Term Rate Currencies can be designated as “Rate Switch
Currencies”, which means that they will become Compounded Rate Currencies on pre-agreed
terms in accordance with the conditions in the agreement.
The Compounded Rate Currencies are sterling, USD and CHF. “Compounded Rate Loans” in
these currencies reference SONIA, SOFR and SARON respectively, compounded in arrears.
The only Term Rate Currency for which full provision is made is euro. Loans in euro (being
“Term Rate Loans”) reference EURIBOR. This reflects that, as noted in section 3.2 of Part I,
most borrowers are preferring to continue to use EURIBOR for the time being rather than
switching to €STR for euro loans. If euro is designated as a Rate Switch Currency, the
agreement provides the mechanics to effect a switch from EURIBOR to €STR compounded in
arrears after the date of the agreement.
Certain terminology applicable to Term Rate Loans has been adapted to reflect the inclusion of
Compounded Rate Currencies, but the interest rate and related provisions applicable to Term
Rate Loans are in substance the same in the Compounded/Term MTR as in the IBOR MTR.
This Part II contains a commentary on the key provisions of the Compounded/Term MTR that
differ from the IBOR MTR. These comprise primarily the provisions that relate to Compounded
Rate Loans. A brief description of the operation of each key provision is included to assist
treasurers who may be using this commentary for the purposes of reviewing draft loan
documentation without the benefit of access to the Compounded/Term MTR template.
2. Interest provisions - overview
2.1 Calculation of interest The agreement acknowledges that the parties may need to agree changes to the
Reference Rate Terms from time to time (for example, if market practice
Clause 9 (Interest) makes separate provision for the calculation of interest on evolves). A “Reference Rate Supplement” is a document agreed between the
Term Rate Loans and on Compounded Rate Loans: Borrower and the Agent (acting on the instructions of the specified majority of
• The rate of interest on a Term Rate Loan for an Interest Period is the Lenders) that specifies whether the currency is a Compounded Rate Currency
percentage per annum that is the sum of the “Term Reference Rate” and or a Term Rate Currency and the applicable reference rate terms for that
the Margin. The “Term Reference Rate” is defined as the Primary Term Rate currency (i.e. equivalent terms to those set out in Schedule 13 for sterling, USD,
(eg for euro, EURIBOR) or if there is no Primary Term Rate, the specified euro and CHF). Optional provision is made for the Agent to consent separately
fallbacks (see section 5 below). in its capacity as such (given its role in administering Reference Rate Terms.
A Reference Rate Supplement (pursuant to Clause 1.2(g)) overrides any pre-
• The rate of interest on a Compounded Rate Loan for any day during an existing Reference Rate Terms relating to the relevant currency.
Interest Period is the percentage per annum that is the sum of the
“Compounded Reference Rate” and the Margin. The “Compounded If the facility is to be available from the outset in currencies other than sterling,
Reference Rate” (in summary) is the sum of the “Daily Non-Cumulative USD, euro and CHF, the parties will need to agree appropriate Reference Rate
Compounded RFR Rate” for that day and the CAS, if applicable. Terms for that currency and add them to Schedule 13 (Reference Rate Terms).
For Optional Currencies which are not pre-approved, the parties will need to
The key point of difference is that the calculation of interest on Term Rate Loans agree whether the currency is to be a Compounded Rate Currency or a Term
(because they reference a forward-looking term rate) is over the Interest Period. Rate Currency (and if so, whether the currency is a Rate Switch Currency) and
The calculation of interest on Compounded Rate Loans is daily, on each day an appropriate “Reference Rate Supplement”, at such point as drawings in the
during an Interest Period. This is a function of the compounding methodology Optional Currency are needed. Clause 4.3 (Conditions Relating to Optional
recommended in the Sterling Loan Conventions and reflected in the LMA RFR Currencies) provides a new condition precedent to the drawing of an Optional
Templates. See section 3 below. Currency, that there are Reference Rate Terms for that currency.
2.2 Reference Rate Terms 2.3 Alterations to Reference Rate Terms
The components of the applicable Term Reference Rate or Compounded The volume of legacy LIBOR transactions that require amendment to
Reference Rate are specified by currency in Schedule 13 (Reference Rate accommodate the move to RFRs suggests it is prudent to include provisions in
Terms). The approach of providing separate terms for each currency adds length all loan documentation that facilitate the future replacement or adjustment of
to the agreement, but enables the calculations applicable to different currencies reference rate terms as efficiently as possible. The Compounded/Term MTR
to be easily ascertained and allows the straightforward accommodation of does this quite comprehensively.
discrepancies between currencies.
Optional clause 9A (Rate Switch) enables the parties to switch Term Rate Currencies
(or selected Term Rate Currencies) to Compounded Rate Currencies automatically
and for the application, when the switch is triggered of new and pre-agreed Reference
Rate Terms.
Reference Rate Terms for euro, for example, are provided for both euro loans
referencing EURIBOR and euro loans referencing €STR. The latter will be needed
if the parties include the option to switch euro from a Term Rate Currency to a
Compounded Rate Currency at a later date. If the agreement has been adapted to
include Term Rate Currencies other than euro, and it is agreed to switch to RFRs at a
later date, the euro Reference Rate Terms schedule provides a model into which the
terms appropriate for that currency can be incorporated. See further section 4 below.
The Reference Rate Supplement route outlined at section 2.3 above enables
adjustments to be made to existing Reference Rate Terms. A similar route is available
if changes to the compounding methodologies applicable to Compounded Rate Loans
are necessary. A “Compounding Methodology Supplement” is a document agreed
between the Borrower and the Agent (acting on the instructions of the specified
majority of Lenders), which (pursuant to Clause 1.2(g)) overrides any pre-existing
terms relating to the relevant Compounded Rate Currency (eg as set out in Schedules
14 and 15, see section 3 below). These provisions will be useful, for example, should
conventions or market practice evolve on the more detailed aspects of using RFRs.
Clause 35.4 (Changes to Reference Rates) provides a mechanism for amending the
agreement to accommodate changes to reference rates more generally, subject
to the consent of the specified majority of Lenders and the Borrower. While this
route could, in theory, also be used to adjust Reference Rate Terms, it is aimed at
situations where (as in the case of LIBOR currently), a reference rate needs to be
replaced after the date of the agreement, necessitating new Reference Rate Terms
and most likely broader changes to related provisions. See further section 8 below.
3. Interest on Compounded Rate Loans
3.1 NCCR vs CCR For reference, Schedule 14 (Daily Non-Cumulative Compounded RFR Rate) and
Schedule 15 (Cumulative Compounded RFR Rate) of the Compounded/Term MTR
The Sterling Loan Conventions recommend the use of a non-cumulative (lookback without observation shift) are reproduced with the permission of the
compounded rate (NCCR) in loans (see section 4 of Part I). The Compounded/ LMA for reference in the Appendix to this Part II.
Term MTR therefore uses an NCCR as the basis of the calculation of interest on
Compounded Rate Loans. The NCCR formula reflects the non-cumulative As the Daily Non-Cumulative Compounded RFR Rate (the NCCR) is derived
compounding methodology recommended by the UK RFRWG in the Sterling from a CCR, it adds a further level of complexity to rate determinations. As
Loan Conventions and has been crafted to align with the principle in the Sterling noted in section 3 of Part I, the NCCR has been recommended for loans
Loan Conventions that the NCCR applied daily over a period must yield the because it better supports intra-period events such as prepayments and trading.
same result as the application of the cumulative compounded rate (CCR) over The NCCR formula generates a daily compounded rate which allows the
the same period. calculation of a daily interest amount, enabling accurate calculation of accrued
interest at any point in time. An NCCR is not needed or typically used in capital
The starting point is the definition of “Compounded Reference Rate”, which is the markets products nor reflected in the ISDA IBOR fallbacks.
rate at which interest is payable on Compounded Rate Loans. The Compounded
Reference Rate (in summary) is the sum of the “Daily Non-Cumulative While it might “better support” intra-period prepayments (by making
Compounded RFR Rate” (ie. the NCCR) for that day and the CAS, if applicable. prepayment amounts more straightforward for lenders to calculate), the UK
RFRWG’s Best Practice Guide for GPB Loans notes that an NCCR is not
The Daily Non-Cumulative Compounded RFR Rate is calculated for each RFR essential for the purpose of calculating prepayment amounts. The NCCR is
Banking Day by reference to a mathematical formula specified in Schedule 14 therefore of primary importance for the purposes of trading and efficient
(Daily Non-Cumulative Compounded RFR Rate). The Daily Non-Cumulative prepayments in syndicated deals. If LMA RFR terms are being adapted for
Compounded RFR Rate, in essence, is the CCR for that day minus the CCR for bilaterals or even certain clubbed loans, the parties may agree to dispense with
the previous day. It is therefore necessary to calculate a CCR in order to arrive the Daily Non-Cumulative Compounded RFR Rate and calculate the
at the Daily Non-Cumulative Compounded RFR Rate. The CCR calculation Compounded Reference Rate by reference to a CCR formula only, which
required for the purposes of the Daily Non-Cumulative Compounded RFR Rate generates a single compounded rate of interest for the whole period.
is incorporated into the formula in Schedule 14.
The use of a CCR in appropriate cases will not only simplify the drafting of the
A standalone CCR formula is also specified in Schedule 15 (Cumulative loan agreement but may also better reflect the basis on which the CCR is
Compounded RFR Rate). The Cumulative Compounded RFR Rate in Schedule recorded in most treasury management systems. It may also facilitate the use of
15 is used for the purposes of the calculating the rate over a period that is used indices (see section 5 of Part I).
to determine whether the market disruption provisions in the agreement are
triggered (see section 6 below). If it is agreed that market disruption provisions
will not apply to Compounded Rate Loans, Schedule 15 can be omitted.
3.2 Length of lookback Emerging market practice appears to be to adopt the lookback without
observation shift approach in line with the recommendation of the UK RFRWG.
The compounding formulae in Schedules 14 and 15 incorporate a “Lookback Virtually all of the corporate loans containing a rate switch or referencing RFRs
Period”. The reasons for the lookback are discussed in section 4.3 of Part I. and completed over the last six months of which we are aware have not adopted
The length of the Lookback Period applicable to the relevant currency is the observation shift.
specified in Schedule 13 (Reference Rate Terms). The five RFR Banking Day There may, however, be instances where a lookback with observation shift is
lookback recommended in the Sterling Loan Conventions is included as the the preferred approach, for example, where alignment with associated hedging
optional default position for all Compounded Rate Currencies. Five RFR Banking is important (see section 8 of Part I) or where there is a desire to use a
Days appears to have been adopted in most transactions completed to date. Compounded RFR Index that uses that convention (see section 5 of Part I).
There are, however, situations where a different Lookback Period might be
more appropriate, for example, a shorter lookback if drawings are likely to be 3.4 Business Days, Additional Business Days and RFR Banking Days
for very short periods. Conversely, a longer lookback might be appropriate if
borrowers or certain borrowers are situated in jurisdictions where it takes The Compounded/Term MTR includes the concept of a Business Day, as well
more time to mobilise payments. The UK RFRWG has acknowledged possible as two new defined terms – “Additional Business Day” and “RFR Banking Day”.
variations in the length of the Lookback Period depending on borrower/lender These are subtly different and must be used with care when adapting the terms
need, for example in the context of transactions in developing markets. of the template.
In many RFR-linked deals, the length of the Lookback Period will also drive the The definition of “Business Day” is used in the Compounded/Term MTR, as
notice period for voluntary prepayments of Compounded Rate Loans. See in the IBOR MTR, to frame time periods for payment obligations, notification
section 7.2 below. obligations and other actions under the agreement. It is defined as a day on
which banks are open for general business in London (reflecting that LMA terms
3.3 Observation shift or not assume the Agent is located in London) and a placeholder for any other
specified financial centre. The placeholder will be typically filled to include the
The Compounded/Term MTR exists in two versions; the key difference between financial centre(s) of the currencies in which the facility is to be drawn (for
the two is in the compounding formulae in Schedules 14 (Daily Non-Cumulative example, New York for USD).
Compounded RFR Rate) and 15 (Cumulative Compounded RFR Rate).
The definition of “Business Day” contains a further nuance in the Compounded/
The versions of these Schedules without observation shift are reproduced in Term MTR. It provides that for certain actions under the agreement that require
the Appendix to this Part II. In the version with observation shift, the weighting a rate fixing, “Business Day” means an “Additional Business Day”. An “Additional
elements of the formulae refer to the days in the observation period rather than Business Day” is defined as a day on which banks are open for general business
the days in the interest period. See section 4.4 of Part I.
in London and such other day as is specified as an Additional Business Day for 3.5 Day count conventions, interest calculation and payment conventions
the relevant currency in Schedule 13 (Reference Rate Terms). The Additional
Business Day concept is required to ensure that, for actions which require a Clause 32.3 (Day count convention and interest calculation) applies a day count
rate fixing, the relevant reference rate is available. convention of ACT/360 or, if practice in a relevant market differs, in accordance
with that market practice, to the calculation of any interest, commission or fee
In relation to Term Rate Loans, the concept of Additional Business Day applies accruing under the agreement. This market practice override operates to apply
only to the fixing of the interest rate itself. Term rates are fixed on the a day count convention of ACT/365 (fixed) for sterling in line with the Sterling
Quotation Day specified in the Reference Rate Terms, which reflect the rate Loan Conventions.
fixing convention in the relevant currency. EURIBOR is quoted on every day that
TARGET is open. An Additional Business Day is therefore a TARGET Day. The UK RFRWG updated its Best Practice Guide for GBP Loans and
accompanying worked examples of the Sterling Loan Conventions in March 2021
In relation to Compounded Rate Loans, there are a broader set of actions which to incorporate certain clarificatory amendments relating to rounding. The
depend on the RFR being published as well as a Business Day in London, namely clarification states that when using the NCCR, interest should be rounded to 2
(i) the date for payments relating to Compounded Rate Loans and (ii) the decimal places only at the end of the Interest Period. This is necessary to ensure
determination of the length/dates of an interest period for Compounded Rate that daily interest amounts calculated using the NCCR equal exactly amounts
Loans. For these actions in relation to Compounded Rate Loans, an Additional calculated using the CCR (in accordance with the Sterling Loan Conventions).
Business Day is further defined as a “RFR Banking Day”. A “RFR Banking Day”
for a given currency is a day on which the daily RFR is published as specified by This clarification resulted in some adjustments to Clause 32.3 as it originally
currency in Schedule 13 (Reference Rate Terms). appeared in the LMA’s January 2021 Exposure Draft of the Compounded/Term
MTR and the deletion of the concept of “Block Rounding Period”. The final
The concept of a RFR Banking Day is also important on a standalone basis for recommended form of this clause makes clear that any interest, commission or
the purposes of the compounding calculation (see section 3.1 above). The fee accruing under a Finance Document will be calculated without rounding.
references to a RFR Banking Day in that context reflect the UK RFRWG’s However, the total amount of any accrued interest, commission or fee which is,
recommendation that interest is compounded only on days when the RFR is or becomes, payable shall be rounded to two decimal places. Note the
published and that in multi-currency loans, interest is compounded on RFR distinction here between the calculation of the rate (no rounding) and amounts
Banking Days for the drawn currency, ignoring whether the day is also a banking of interest etc. that become payable (rounded to two decimal places).
day of the other currencies or not. The concept is therefore relevant for
determining the daily RFR to be used in the compounding calculation. It is understood that if calculations are made using the previous version of this
clause, the difference between a calculation with and without rounding would
The length of the Lookback Period is also determined by reference to RFR amount to a matter of pence, in terms of the difference between the output of
Banking Days rather than Business Days (see section 3.2 above). the NCCR and CCR methodologies.
While the rounding provisions in Clause 32.3 have been drafted to Business Day conventions for the payment of interest are specified by currency
accommodate the Sterling Loan Conventions and compounded RFRs, they apply in Schedule 13 (Reference Rate Terms). The Compounded/Term MTR applies
to all rate calculations and interest payments under the agreement to avoid the “Modified Following Business Day Convention” to Term Rate Loans and
unnecessary complication. This should not result in changes to amounts of Compounded Rate Loans, such that payments of interest that would fall to be
interest payable in respect of Term Rate Loans. Term rates (eg EURIBOR) made on a day that is a Non-Business Day are adjusted to the next succeeding
appear on screen, rounded in accordance with market convention, so that the Business Day, unless that Business Day falls in the next calendar month, in which
specified calculation rounding convention does not apply. Further, general case the interest payment date is the preceding Business Day. This is in line with
market practice is to round all amounts of interest payable to two decimal the UK RFRWG recommendation for sterling RFR loans.
places for practical reasons.
See section 3.4 above in relation to the definition of Business Day.
Schedule 14 (Daily Non-Cumulative Compounded RFR Rate) and its footnotes,
reproduced in the Appendix to this Part II, provide that in applying the formula to 3.6 Zero floors
calculate the daily rate, the “no rounding” convention is subject to the limits of It has become reasonably common in LIBOR and EURIBOR referencing loans to
systems capabilities. This is to ensure that rounding-related systems constraints set a contractual floor of zero on the benchmark rate, such that the Lenders’
do not prevent a Finance Party from performing the necessary calculations. Margin yield is protected should the benchmark become negative. The
Treasurers may wonder, if such systems limitations result in the use of rounded definitions of “LIBOR” and “EURIBOR” in the IBOR MTR provide, optionally,
amounts, whether that is inconsistent with the recommendations of the UK that each relevant IBOR shall be floored at zero. If the zero floor is included, the
RFRWG noted above and as reflected in Clause 32.3 (Day count convention and amount of interest payable (the sum of the relevant IBOR and the Margin),
interest calculation). It is understood that this should not be the case. cannot fall below the amount of the Margin.
A systems “work around”, known as the “crumbs” approach, enables the daily The Compounded/Term MTR applies the same optional zero floor wording to
amounts of interest which result from the application of the NCCR to the Term Rate Currencies as in the IBOR MTR, in the definition of “Term Reference
principal amount to be carried forward on an unrounded basis. However, it Rate”. The operation of the zero floor (if agreed) to a Compounded Rate
seems that the “crumbs” approach cannot be used in the calculation of the daily Currency, however, is presented differently. The Sterling Loan Conventions
NCCR itself as some systems have a maximum number of decimal places, eg 16. recommend the daily application of any agreed interest rate floor (rather than
This is the reason for the wording addressing the limits of systems capabilities in the floor being applied at the end of the interest period as in the case of Term
this Schedule. Appendix 3 of the UK RFRWG’s Best Practice Guide for GBP Rate Loans) because Compounded Rate Loans accrue interest daily. Accordingly,
Loans, “Technical and Systems Capability Guidance”, contains further the zero floor applicable to a Compounded Rate Currency appears in the
information on this topic. definition of “Daily Rate” (which is either the relevant RFR for a given RFR
Banking Day, or, if unavailable, the applicable fallback) in Schedule 13 (Reference
Rate Terms). The definition of Daily Rate provides, optionally, that if the Daily from the date of the agreement (ie. loans in sterling, USD and CHF). A footnote
Rate is less than zero, it shall be deemed to be zero. The optional zero floor in the agreement records the reason for this: to avoid an economic difference
wording is applied here rather than in the definition of Compounded Reference between transactions that include a separate CAS as part of the Compounded
Rate, so that the zero floor is applied daily in the compounding formulae. Reference Rate and those which do not.
There is a commercial point here for Borrowers regarding the operation of the In the Compounded/Term MTR, whether to include a separate CAS as part of
zero floor, if included, in relation to Compounded Rate Loans. the Compounded Reference Rate for sterling, USD and CHF is optional (see
section 3.7 below). If a separate CAS is included (ie. the Compounded Reference
In RFR-linked facilities that include a separate CAS as part of the pricing, it is Rate is priced at the Daily Non-Cumulative Compounded RFR Rate plus CAS),
typically the case that any interest rate floor is applied to the sum of the the definition of “Daily Rate” can be adjusted easily to provide that if the
compounded RFR and CAS, rather than the compounded RFR alone. In other aggregate of that rate and the applicable CAS is less than zero, the Daily Rate
words, the floor is applied to all components of the pricing that reflect amounts shall be deemed to be such a rate that the aggregate of the Daily Rate and the
that would once have been reflected in LIBOR. The purpose of this practice is to applicable CAS is zero. Borrowers may wish to make this adjustment, in
align the application of a zero floor in a RFR-linked facility to how a floor would particular, in the current interest rate environment.
apply in a loan referencing LIBOR, and is consistent with the principle that the
transition from LIBOR to RFRs should not involve a transfer of value between If the pricing does not include a separate CAS (ie. the Compounded Reference
Lender and Borrower. Rate is priced at the Daily Non-Cumulative Compounded RFR Rate only),
Borrowers may wish to consider the potential impact of any zero floor. Some
This also reflects the UK RFRWG’s recommendation for legacy contracts might argue that the zero floor should not apply (certainly if that was the case in
containing an interest rate floor, that where the aggregate of the RFR and CAS relation to their LIBOR facilities). Other options might include building in a
is less than the floor value, the CAS should remain unchanged with the RFR CAS-equivalent adjustment, simply for the purposes of applying the floor. For
adjusted to ensure that the sum of the two is equal to the floor value. The UK example, the definition of “Daily Rate” could be adjusted to provide that if the
RFRWG has however recognised that an alternative method, where the CAS is aggregate of that rate and (for example) a specified “floor adjustment” (a
adjusted, may be preferred by some market participants. number of bps) is less than zero, the Daily Rate shall be deemed to be such a
The Compounded/Term MTR applies the zero floor to the sum of the Daily rate that the aggregate of the Daily Rate and the applicable floor adjustment is
Rate plus CAS in relation to Rate Switch Currencies, which switch to a zero. This could also potentially be achieved by applying a Margin ratchet
compounded RFR plus CAS (see further section 4 below). This approach also mechanism that adjusts the Margin by reference to a negative Daily Rate.
applies in relation to Term Rate Currencies for which a compounded RFR plus
CAS is to apply as a fallback (see further section 5 below). However, the same
does not apply to Compounded Rate Loans which reference compounded RFRs
3.7 Credit adjustment spread (CAS) currency where a Margin uplift is used to address the economic difference
between IBORs and RFRs for Compounded Rate Currencies. The RFRs are
CAS or not? quite different – and may generate quite different figures for the CAS and
As discussed in section 6 of Part I, there are two ways of minimising the therefore any associated Margin uplift. The BISL CAS rates, as fixed on 5 March
economic difference between IBORs and RFRs in loan pricing – either the 2021, provide an illustration.
Margin is increased by the appropriate amount, or a CAS is included as a Consideration should also be given to the impact of any increased Margin on
separate component. Whether the Compounded Reference Rate (the interest other metrics in the facility agreement that reference the Margin. For example,
rate on Compounded Rate Loans) includes a CAS – a “Baseline CAS” in the whether Margin ratchet amounts need to be re-set. If commitment or other
terminology of the Compounded/Term MTR – is therefore optional. fees are set at a proportion of the Margin, that proportion may need to change
A CAS is useful as a means of monitoring the economic impact of transition in from the levels customary in LIBOR facilities.
loans that are moving from LIBOR to RFRs via either an amendment process or CAS methodology
pursuant to rate switch provisions. It is less obvious why a separate CAS is
required in a new RFR-referencing facility. Some RFR-linked loans have used a There are two methodologies for calculating the CAS that have emerged in the
separate CAS possibly because it is helpful for purposes of transparency in this context of actively transitioned loans, the 5YHLB approach and the forward
transitional period, but also because a CAS assists with the structuring of other approach, as discussed in section 6 of Part I. As far as we are aware, the CAS
aspects of the agreement (for example, the operation of zero floors, see section applicable to most actively transitioned sterling and USD English law RFR-linked
3.6 above and the market disruption provisions, see section 6 below). More loans completed to date has been calculated based on the 5YHLB methodology
recently, RFR-linked lending appears to be proceeding in many cases without a However, some early sterling RFR-linked loans used the forward approach and it
separate CAS component. In either case, the pricing will, of course, be agreed has been considered again in a few more recent sterling loans.
between the parties in the normal way, taking into account market conditions,
relationships and other factors. Interest in alternatives to the 5YHLB more recently may have been due to the
movements in the LIBOR/SONIA spread. These are described in the FCA’s
Even if no Baseline CAS is included, treasurers will need to be familiar with the Q&As on conduct risk in relation to LIBOR transition:
options for calculating the CAS in line with their preferred approach to enable
them to anticipate the size of the Margin uplift that might be expected compared “In spring 2020…as financial markets reacted to the impact of coronavirus (Covid-19),
to previous LIBOR facilities. This will need to be considered currency by currency the spread between LIBOR and SONIA moved substantially above the then 5-year
and taking into account the operation of the zero floor, see section 3.6 above. historical median. The spread then moved below the 5-year historical median due to
various market factors. This likely included the significant expansion of liquidity
In contrast to the IBOR MTR, which envisages a single Margin for all currencies, provided by central banks, though market prices suggest expectations that it will rise
the Compounded/Term MTR provides for a Margin to be specified in the again in future.”
Reference Rate Terms for each currency separately. Margins are likely to vary by
Any economic differences between a CAS calculated using the forward always the case). In some instances a methodology could be considered which is
approach and a CAS calculated based on a 5YHLB will need to be assessed at applied to calculate the spread at the beginning of each Interest Period, although
the time of the transaction. it may be necessary to take into account how the spread would be calculated
after the cessation of the relevant LIBOR rate.
When determining whether to adopt the forward approach or the 5YHLB,
relevant considerations may include consistency with other products as well as There may also be a question as to whether the Baseline
the relative outputs of each calculation methodology. The forward approach CAS should vary according to the length of the Interest Period applicable to the
may be more consistent with the approach being taken in the derivatives market relevant Compounded Rate Loan. Again, the BISL CAS illustrate that spreads
to active transition (as opposed to transition via fallbacks on cessation/pre- can be different across Interest Periods. Some Borrowers may prefer a single or
cessation where the 5YHLB is being used), as well as in the sterling FRN market. blended CAS that applies across all tenors.
The approach to the CAS may also depend on the banking group. Some lenders,
for example, appear to have adopted a policy of using only the 5YHLB for Rate Switch CAS/Fallback CAS
operational reasons. The Compounded/Term MTR contains two further concepts of CAS, in addition
If a Baseline CAS is to be included, the parties will need either to specify the to the Baseline CAS referred to above:
methodology to be used to calculate it in the agreement, or if it is to be a fixed • A “Rate Switch CAS” is part of the Compounded Reference Rate applicable
amount, insert the agreed amount. If a methodology rather than a fixed CAS is following a rate switch for a Rate Switch Currency.
specified, a footnote in the Compounded/Term MTR highlights the possibility that
the Baseline CAS could be a negative number and suggests the parties consider • A “Fallback CAS” is part of the Compounded Reference Rate applicable to a
applying a zero floor. We have not seen this adopted in practice yet. Term Rate Currency for which a Compounded Reference Rate applies as a
fallback to the relevant Primary Term Rate.
Should the parties specify a methodology or a fixed CAS?
Unlike the Baseline CAS which is presented as optional, the Rate Switch CAS
In rate switch deals, there remain a variety of approaches. The parties may and Fallback CAS are both assumed to apply as a means of addressing the
specify a methodology to be applied when the switch occurs, if the Agent is economic difference between the relevant IBOR and compounded RFR on a
happy to undertake those calculations. Alternatively, the CAS may be fixed at a shift from one to the other. A footnote highlights the possibility that these CAS
specified percentage per annum, or in some more recent deals, by reference to may be capable of producing a negative result when calculated, in which case the
the appropriate BISL CAS. parties may wish to apply a zero floor.
In a loan referencing a RFR from the outset, a fixed CAS, either a percentage The rate switch and fallback provisions of the Compounded/Term MTR, including
per annum or the adoption of the BISL CAS, appears the more common the appropriate CAS, are discussed further in section 4 and section 5 below.
approach, where a separate CAS is included (which as noted above, is not
3.8 Application of Sterling Loan Conventions whatever length best suits the parties. Unless Borrowers have a specific need
for flexibility, emerging practice suggests that Interest Periods for Compounded
The Compounded/Term MTR applies the Sterling Loan Conventions to Rate Loans are largely the same as those that feature in LIBOR-referencing loans
Compounded Rate Loans in all currencies (ie. sterling, USD, CHF and euro ie. one, two, three or six months, or as otherwise agreed between the parties.
(where applicable)). As noted in section 4.6 of Part I, while there are some
differences between the conventions recommended by each of the Working In LIBOR-referencing loans, Interest Periods of twelve months may also be
Groups for their domestic market, for simplicity and potential operational ease, permitted. Paragraph (h) of Clause 10.1 (Selection of Interest Periods) of the
the LMA RFR Templates do not attempt to accommodate these variations. Compounded/Term MTR, however, states that no Interest Period shall exceed
However, this is not a recommendation. Should the parties decide to adopt six months.
different conventions, the relevant terms can be adjusted as required.
The reason for this relates to Compounded Rate Loans. In relation to Interest
Borrowers will need consider the appropriate conventions by reference to their Periods of longer than six months, customary practice has been to require the
broader capital structure and home currency. For example, while predominantly Borrower to make interim payments of interest every six months. The NCCR
sterling borrowers may be happy to apply the Sterling Loan Conventions to methodology does not envisage the making of interest payments during an
drawings in other currencies, predominantly USD denominated groups may wish Interest Period and would need to be adjusted to accommodate this
to apply the ARRC conventions for SOFR in arrears to USD drawings for (compounding being aimed at compensating lenders for the time value of money).
consistency with other USD liabilities and/or hedging arrangements.
While of primary relevance to Compounded Rate Loans, the restriction in the
Initial indications are that the LMA’s approach of applying the same conventions Compounded/Term MTR applies to both Compounded Rate Loans and Term
across all currencies is being accepted in multi-currency facilities. At the time of Rate Loans. This is because the application of the NCCR is also relevant to Rate
writing, this is based on a relatively small sample and may be the result of the Switch Currencies following a switch and Term Rate Currencies for which a
sterling loan market being ahead of other currencies in terms of the rate of Compounded Reference Rate is to apply as a fallback to the relevant Primary
transition. Term Rate (see section 4 below). Where neither of these circumstances apply,
Borrowers who would prefer more flexibility may wish to consider limiting any
3.9 Interest periods restriction on the maximum length of interest periods to Compounded Rate
The permitted length of Interest Periods are left to be specified in Schedule 13 Currencies only.
(Reference Rate Terms) by currency.
As RFRs can be compounded over any given period, the length of permitted
interest periods for Compounded Rate Currencies can, in theory, be agreed at
4. Rate switch for Term Rate Currencies
Clause 9A (Rate Switch) provides a mechanism that can be applied, optionally, to The more likely application of the rate switch provisions may be to loans in
any Term Rate Currency such that, on a pre-agreed date or following the USD, in light of the FCA’s confirmation that most USD LIBOR tenors will
occurrence of a specified trigger event, the interest rate for loans in that continue to June 2023 (discussed in section 2 of Part I). While the authorities, as
currency will automatically switch from referencing an IBOR to referencing a already noted, have indicated that there will be restrictions on the use of the
compounded RFR. The provisions of this clause reflect the mechanism in the remaining USD LIBOR tenors after the end of 2021, there may be good reasons
Rate Switch MTR. why some Borrowers may prefer to wait to switch to SOFR. A key point to
note is that, as mentioned in section 8 of Part I, USD LIBOR hedging that
A Term Rate Currency to which the rate switch is specified to apply is referred incorporates the ISDA IBOR Fallbacks will not fall back to SOFR on 1 January
to as a “Rate Switch Currency”. A Term Rate Currency will only be a Rate 2022, when the first of the USD LIBOR tenors cease. Instead, the ISDA IBOR
Switch Currency if it is designated as such in Schedule 13 (Reference Rate Fallbacks provide for the use of interpolated USD LIBOR rates until 30 June
Terms) and if that Schedule includes Reference Rate Terms applicable to 2023 when the remaining USD LIBOR tenors cease or lose representativeness.
Compounded Rate Loans in that currency.
The “Rate Switch Date” is a key definition for Borrowers to pay attention to if
The Reference Rate Terms for a Term Rate Currency which is also a Rate Rate Switch Currencies are included. This is the date following which (subject to
Switch Currency will therefore need to include two parts – one which sets out limited exceptions) interest payable in respect of loans in the Rate Switch
the terms that apply to loans in that currency prior to the switch (ie. loans Currency will cease to reference LIBOR, and instead will reference RFRs.
referencing the relevant IBOR) and one which sets out the terms that apply to
loans in that currency after the switch (ie. loans referencing the relevant The “Rate Switch Date” is defined as the earlier of the “Backstop Rate Switch
compounded RFR). Date” and any “Rate Switch Trigger Event Date” for a given currency:
The Compounded/Term MTR optionally applies the rate switch provisions to • A Backstop Rate Switch Date is a pre-agreed date which is specified in the
euro only, euro being the only Term Rate Currency. This provides a model for agreement or subsequently agreed between the parties (the Agent, the
Reference Rate Terms that may be helpful for any other Rate Switch Currencies Company and the specified majority of Lenders). This is to be used if the
that might be added. The designation of euro as a Rate Switch Currency is not, parties wish, at some point after the date of the agreement, to actively
however, mandatory. Some Borrowers may conclude it is helpful to include a transition loans in the Rate Switch Currency to RFRs.
framework for euro, which can be applied at the agreed “Rate Switch Date” (see
further below). However, given there are no current plans to discontinue • A Rate Switch Trigger Event Date is intended to capture those dates on
EURIBOR, and the conventions for referencing €STR in loans are yet to be which transitioning loans in the Rate Switch Currency to RFRs becomes
finalised, it is anticipated that many Borrowers may prefer to wait and see. This necessary. In summary, it captures the date on which the Primary Term Rate
would mean RFR terms for euro would be negotiated as required pursuant to (ie the relevant IBOR) is discontinued or (optionally) the date on which it
the “Changes to the Reference Rate” provisions (discussed at section 8 below). becomes non-representative of the underlying market it is intended to
measure (with the option to specify additional trigger events).
The definition of Rate Switch Date provides for the switch to occur in relation Optional clause 9A.3 provides (where the Rate Switch Date is known in
to a Rate Switch Currency if a Rate Switch Trigger Event occurs in relation to advance), for Interest Periods applicable to drawn loans that extend beyond
one or more “Quoted Tenors” ie. tenors for which the relevant benchmark is the Rate Switch Date to be shortened such that they come to an end on the
quoted. This means, for example, that upon the planned cessation of certain Rate Switch Date (meaning accrued interest will need to be paid earlier). This
USD LIBOR rates at the end of 2021, if USD is a Term Rate Currency and a optional clause has not been widely adopted so far as far as we are aware.
Rate Switch Currency, Loans in USD would cease to reference LIBOR
notwithstanding the continuing availability of the more popular USD LIBOR Clauses 9A.2 and 9A.3 should be considered in light of the operation of any
tenors. Borrowers may wish to consider whether this is the preferred outcome. related hedging, so the products move in tandem. Under the ISDA Protocol
and the ISDA Supplement, the LIBOR rate for any reset date under the swap
Following the Rate Switch Date, interest on loans in the Rate Switch Currency following the Index Cessation Effective Date will be the RFR fallback rate. A
will be the sum of the Compounded Reference Rate plus the Margin, where the swap hedging a loan should include reset dates that are aligned with the loan’s
Compounded Reference Rate is the sum of the compounded RFR plus a CAS. LIBOR fixing dates, meaning that Clause 9A.2 may be the correct default
The Compounded/Term MTR assumes a “Rate Switch CAS” will apply to position for the loan if ISDA standard terms are maintained for the swap.
account for the economic difference between the relevant IBOR and
compounded RFR following a switch, and to thereby ensure there is no transfer How the Rate Switch CAS is to be calculated is left to be agreed by the
of value from one party to another. parties. The possibilities are discussed in section 3.7 above. In the context
of a rate switch the Borrower will also need to consider whether it wishes
Clause 9A contains two options relating to the timing of the Rate Switch. Clause to specify the Rate Switch CAS in the agreement, or rather specify the
9A.2 provides that notwithstanding the occurrence of a Rate Switch Trigger methodology to be applied to calculate the CAS when the Rate Switch Date
Event, drawn loans will continue to reference the Primary Term Rate until the occurs. Some Agents have expressed a reluctance to apply a methodology,
end of the Interest Period. New or rollover drawings after the Rate Switch Date preferring to apply a fixed CAS instead. Borrowers will, however, need to
will use the Compounded Reference Rate. This means, for example, that if a think carefully about the implications of a fixed CAS, in particular in relation
rate switch date occurred on 1 January 2022, a drawing on 31 December 2021 to currencies where the anticipated switch date spans beyond this year.
referencing 3 month LIBOR would continue to bear interest at LIBOR until the
end of the Interest Period at the end of March 2022. For the next interest
period, the loan would bear interest at the Compounded Reference Rate.
5. Fallbacks
5.1 Term Rate Currency fallbacks
Unavailability of Primary Term Rate
Fallbacks are intended to address the temporary unavailability of a reference
rate, by specifying how the interest rate will be calculated in the event that the
relevant reference rate is unavailable for a given period. The Compounded/
Term MTR applies different fallbacks to Compounded Rate Loans and Term Interpolated Primary Term Rate
Rate Loans.
The fallbacks that apply to Term Rate Loans under the Compounded/Term
MTR are an updated version of those that apply under the IBOR MTR and
which are discussed in the ACT Borrower’s Guide. If the Primary Term Rate Primary Term Rate for Shortened Interest Period
(ie. the relevant IBOR) is unavailable, while there is now no fallback to
Reference Bank Rates, an expanded waterfall of other options is provided,
from which the parties can pick the components they wish to apply. The full list
of options is illustrated in the diagram opposite. Historic Primary Term Rate for Shortened Interest Period
The new options included in the Compounded/Term MTR are the fallback to
an Alternative Term Rate and the fallback to a Compounded Reference Rate.
Interpolated Historic Primary Term Rate
An “Alternative Term Rate” contemplates the availability of another forward- for Shortened Interest Period
looking term rate for the relevant currency. The thought here is that the
forward-looking term rates to be derived from certain of the RFRs (discussed
at section 3 of Part I) might be appropriate fallbacks. Where the relevant term “Alternative Term Rate” (plus any applicable CAS)
rate is not yet available, this is not necessarily a barrier to its inclusion in the
waterfall as an interim fallback, although Borrowers may obviously prefer to
have an idea of how the rate behaves and the appropriate CAS to be applied,
before agreeing to its inclusion. Interpolated “Alternative Term Rate”
(plus any applicable CAS)
The fallback to a Compounded Reference Rate or cost of funds in the final
stage of the waterfall envisages the use of a compounded RFR plus CAS as a
temporary fallback for Term Rate Currencies, or else cost of funds, the current
ultimate fallback in most IBOR-referencing loans. Compounded Reference Rate or cost of funds
The Compounded/Term MTR does not apply either of the two new fallbacks (to These fallbacks are specified by currency in Schedule 13 (Reference Rate Terms).
an Alternative Term Rate and Compounded Reference Rate) to loans in euros. The inclusion of Central Bank Rates in the waterfall obviously means the
Instead, save for the removal of references to Reference Bank Rates, the fallbacks drafting is different for each currency.
from EURIBOR are configured in the same way as those in the IBOR MTR.
The inclusion of an ultimate fallback to cost of funds is optional for
The omission of a fallback to an Alternative Term Rate ie. a forward-looking Compounded Rate Loans. There is some debate as to whether an ultimate
term rate derived from €STR is the result of the public consultation by the Euro fallback to cost of funds is appropriate for Compounded Rate Loans. This is
Working Group on €STR-based EURIBOR fallback rates, which envisages that partly conceptual. RFRs are not a proxy for term funding costs in the way that
the use cases for a forward-looking term rate derived from €STR are relatively LIBOR is. There is also an argument that an ultimate fallback beyond a central
narrow and do not include mainstream corporate lending. bank rate is unnecessary, given the very remote possibility of it ever being
triggered (and the provision in Clause 1.2(f), which provides that any reference
The omission of a fallback to compounded €STR for loans in euro is because the to a central bank rate in the agreement includes any replacement for or
Euro Working Group is expected shortly to make recommendations for successor to that rate). In many deals, cost of funds is being omitted in relation
EURIBOR fallbacks following the public consultation referred to above. The to Compounded Rate Loans.
LMA’s intention is to update the EURIBOR fallbacks in its documentation in due
course to the extent necessary to reflect the outcome of that consultation and 5.3 New definition of cost of funds
any resulting recommendations.
If cost of funds is adopted as a fallback, Borrowers should note that the LMA has
5.2 Compounded Rate Currency fallbacks used the LMA RFR Templates to introduce a new definition of “cost of funds”
into its documentation. This definition is relevant both to the application of cost
The fallbacks that apply to Compounded Rate Loans under the Compounded/ of funds as a fallback and for the purposes of the market disruption provisions
Term MTR are simpler than those that apply to Term Rate Loans. (see section 6 below).
A key input into the compounding formulae in Schedules 14 (Daily Non- The previous concept of cost of funds in LMA facility documentation, which
Cumulative Compounded RFR Rate) and 15 (Cumulative Compounded RFR required the Lender to assess the cost of funding their participation in the loan
Rate) is the “Daily Rate” for the relevant RFR Banking Day. This is the relevant in question from whatever source they might reasonably select, gave rise to
RFR (ie. SONIA, SOFR or SARON) or, if the RFR is not available, a fallback rate. practical difficulties if invoked. The LMA expresses this difficulty (in the
If the RFR is unavailable on any day, a Central Bank Rate plus an optional spread Commentary to the LMA RFR Templates) as “particularly acute when
adjustment (the “Central Bank Rate Adjustment”) will apply in place of the RFR institutions assess the cost of their funding requirements on an aggregated
in the compounding calculation. If the Central Bank Rate is unavailable on any non-granular basis”. The new definition of “cost of funds” appears in clause 1.2
day, a historic Central Bank Rate (no more than a specified number of days old) (Construction) and reads as follows:
plus an optional spread adjustment will apply.
“a Lender’s “cost of funds” in relation to its participation in a Loan is a reference to
the average costs (determined either on an actual or notional basis) which that Lender
would incur, were it to fund, from whatever source(s) it may reasonably select, an
amount equal to the amount of that participation in that Loan for a period equal in
length to the Interest Period of that Loan”
In the context of Compounded Rate Loans, for the reasons given in this section
5 and section 6 below, the concept of cost of funds may be dispensed with. To
the extent that it is retained, this definition is aimed at making its application
more accessible to the Lenders. The reference to “average” costs is intended to
enable the Lenders to assess their funding costs by reference to the cost of their
funding activities for the relevant period and amount as a percentage per annum
on an aggregated basis, rather than needing to assess the costs of any increased
funding requirements for the relevant period attributable to the loan. The
reference to “notional” costs allows the Lenders to do this on 6.
6. Market disruption
Market disruption provisions were designed to protect Lenders against Where there is a CAS, the market disruption provisions should operate in
disruption in the interbank funding market, by allowing them to recover their relation to Compounded Rate Loans in the same way as in relation to Term
actual cost of funds if a sufficient proportion of the syndicate notify the Agent Rate Loans. Where there is no CAS, cost of funds may not be an accurate
that they are unable to fund themselves at the relevant reference rate ie. the substitute for the compounded RFR – and more importantly, the provision may
IBOR. The notification must be made at the beginning of the relevant Interest arguably be easier to trigger (RFRs not being a reflection of funding costs in
Period when the forward-looking rate is set. The Lenders’ cost of funds as distressed markets). Borrowers may argue, therefore, that market disruption
notified to the Agent (“Funding Rates” in LMA terminology) will then apply in provisions are redundant in the context of Compounded Rate Loans.
place of the relevant IBOR for that Interest Period. Lenders’ cost of funds are
based on whatever source they may reasonably select. An additional point to be aware of is that to work in the context of backward-
looking rates, Lenders are not required to report market disruption in relation
The application of the market disruption provisions to loans referencing RFRs to Compounded Rate Loans until the “Reporting Time”, which is (in summary)
has been the subject of some debate, given the point, noted in section 5 above, the number of days equal to the Lookback Period prior to the last day of the
that RFRs are not a proxy for term funding costs in the same way as LIBOR. Interest Period. This means that the Borrower may not be notified until a few
days before an interest payment is due that it is payable on a cost of funds basis,
In the Compounded/Term MTR the market disruption provisions apply in the giving it limited options but to pay. In relation to Term Rate Loans, in contrast,
same way to Term Rate Currencies as in the IBOR MTR, but are presented as the notification deadline at the beginning of the Interest Period gives rise to the
optional in relation to Compounded Rate Currencies. The benchmark against possibility for the Borrower of negotiating a right to revoke any utilisation
which Lenders are to judge their funding costs is, however, now termed the request (or otherwise, to make a voluntary prepayment), if cost of funds applies.
“Market Disruption Rate” to accommodate multiple rates and is specified by
currency in Schedule 13 (Reference Rate Terms). If a specified percentage of As a result of these difficulties, the omission of market disruption provisions in
Lenders notify the Agent that they are unable to fund themselves at the relation to Compounded Rate Loans has been agreed in some RFR-linked loans
specified Market Disruption Rate for the currency in question, that rate will be signed so far, although there are a range of views among Lenders. Where market
replaced in the interest calculation with the Lenders’ cost of funds. disruption provisions are retained, Borrowers will want to pay close attention
to the specified percentage of Lenders required to trigger the provisions to
See section 5.3 above in relation to the definition of “cost of funds” that is safeguard themselves as far as possible from the likelihood that the provisions
applicable for this purpose. are triggered.
The Market Disruption Rate for Term Rate Currencies will be the relevant As noted in section 3.1 above, the cumulative compounding formula in Schedule
IBOR. The Market Disruption Rate for Compounded Rate Currencies, if 15 (Cumulative Compounded RFR Rate) is included to enable the compounded
included, is the aggregate of the compounded RFR and CAS (if any). RFR to be calculated over the Interest Period for the purposes of the Market
Disruption Rate.
7. Prepayments
7.1 Break costs must be made together with accrued interest on the amount prepaid (a
position unchanged from that under the IBOR MTR and in line with the UK
The IBOR MTR requires that, where a loan is repaid mid-Interest Period, RFRWG recommendation that proportional accrued interest be paid at the
the Borrower compensate the Lenders for their broken funding costs time of prepayment on any amounts of principal prepaid). The notice period
through the payment of Break Costs. The concept of Break Costs assumes for voluntary prepayments of loans therefore needs to take into account
that Lenders are funding themselves on a matched term IBOR basis in the processes involved in calculating the amount of accrued interest payable
the interbank market. Such costs are therefore not possible to calculate and the amount of notice needed by the parties of such amount, which are
in a meaningful way in relation to Compounded Rate Currencies. The potentially different for Term Rate Loans and Compounded Rate Loans.
Compounded/Term MTR therefore continues to apply Break Costs to Term
Rate Currencies, but provides for the optional application of Break Costs The length of the notice period for voluntary prepayments of Compounded
(calculated as agreed between the parties) to Compounded Rate Currencies. Rate Loans will, in most cases, therefore, need to be no less than the
length of the Lookback Period, which will have been set taking these
Emerging market practice points strongly in favour of the disapplication factors into account in respect of interest calculations and payments
of Break Costs to Compounded Rate Loans. In a few instances, this has generally (see section 3.2 for further details). This is, in a number of cases,
led to Lenders seeking alternative protection in the form of a prepayment resulting in a longer minimum notice period for voluntary prepayments
premium or administrative fee to cover the costs of managing mid- of Compounded Rate Loans than applies to voluntary prepayments of
Interest Period prepayments. In others, Lenders have sought to address Term Rate Loans. For example, if the recommended five RFR Banking
this concern by placing limits on the number of voluntary prepayments Day lookback applies to Compounded Rate Loans, Lenders are typically
permitted in any given period (see further section 7.2 below). seeking at least five Business Days’ notice of voluntary prepayments.
7.2 Voluntary prepayments As noted in section 7.1 above, Lenders are, in some circumstances,
seeking to limit the number of voluntary prepayments permitted in any
The IBOR MTR permits voluntary prepayments to be made by the given period as a quid pro quo for omitting Break Costs from application
Borrower provided a minimum period of notice is given to the Agent. to Compounded Rate Loans. Borrowers will need to negotiate any
The length of the notice period is left to be decided by the parties. restrictions on the number of prepayments permitted in a given period so
that the number is set at an appropriate level according to their needs.
The Compounded/Term MTR retains this position in respect of Term Rate
Loans and Compounded Rate Loans. It does, however, provide for a different
minimum notice period to be specified depending on whether the loan is a
Term Rate Loan or Compounded Rate Loan. This is because prepayments
8. Changes to the reference rates
The LMA introduced “Replacement of Screen Rate” provisions to be included “Published Rate Contingency Period” should therefore be similarly relatively
optionally in its recommended forms a number of years ago. These provisions short, to reflect that the parties are likely to want to move on from eg historic
were subsequently incorporated into all the LMA recommended forms, on an rates (if that is the contingency methodology) to an alternative solution.
optional basis. Published Rate Contingency Periods of 30 days/one month have been agreed in
a number of more recent facility agreements.
The provisions were introduced to enable LIBOR and EURIBOR Screen Rates
to be replaced with a lower consent threshold than would otherwise be It is worth noting that pursuant to Clause 35.4, the occurrence of a Published
required to make changes to the interest rate ie. with Majority Lender, rather Rate Replacement Event (eg cessation) that applies to one tenor of a reference
than all Lender, consent, in a number of pre-defined circumstances. In the rate will facilitate the replacement of the reference rate for that tenor only and
Compounded/Term MTR, these provisions have been updated and extended so not for all tenors for which the relevant reference rate is published. In this
they apply to both Screen Rates (eg EURIBOR) and any RFRs that become respect, this trigger for an amendment process as a means of addressing the
unavailable or require replacement after the date of the agreement. replacement of reference rates differs from the rate switch provisions in Clause
9A. Under the rate switch provisions, where the trigger occurs in relation to
Clause 35.4 (Changes to reference rates) enables the parties to make one tenor only, the rate switch occurs for the relevant currency generally ie. for
amendments/waivers to the agreement in question to replace any existing all tenors. The potential implications of this are discussed in section 4 above.
reference rate with a replacement reference rate (together with associated
changes) with Majority Lender, rather than all Lender, consent. The amendment The list of amendments to the agreement which can be made with Majority
process can be initiated by the Finance Parties or the Borrower. The parties Lender consent pursuant to Clause 35.4 has also been expanded from that in
have the option to restrict the application of the clause so that it is only the IBOR MTR to include amendments that relate to, or have the effect of,
triggered upon the occurrence of specified events (“Published Rate Replacement aligning the means of calculating interest on a Compounded Rate Loan to any
Events”), such as the relevant reference rate being discontinued or no longer subsequent recommendations issued by a relevant body. This is a potentially
being representative of the underlying market it is intended to measure. helpful provision, which has been included on an optional basis to give parties
some degree of flexibility in the event that thinking and official
The definition of “Published Rate Replacement Event” includes the relevant recommendations around compounding develop subsequent to the agreement
reference rate being calculated in accordance with the rate administrator’s being signed. As noted in section 2.3 above, however, the Compounded/Term
contingency or fallback policies in circumstances which are not temporary or for MTR separately makes provision, in the definition of “Compounding
a period no less than the “Published Rate Contingency Period’. The minimum Methodology Supplement’, for the mathematical formulae specified in Schedules
period applicable to each currency must be specified in the Reference Rate 14 (Daily Non-Cumulative Compounded RFR Rate) and 15 (Cumulative
Terms applicable to that currency. Contingency methodologies are typically Compounded RFR Rate) to be amended without a formal amendment process
intended only to be used for relatively short-term contingency events. The and subject to fewer parameters than set out in Clause 35.4.
Clause 17.4 (Reference rate transition costs) is an optional placeholder, to be
completed if the parties wish to specify how any costs associated with
amendments or waivers contemplated by Clause 35.4 will be allocated between
them. This topic has been the subject of some debate in the context of
amendments to LIBOR facilities to replace the reference rate. Lenders are often
proceeding on the basis that, as is customary in relation to amendments
requested by the Borrower or necessitated by its own circumstances, the
Borrower will meet the Lenders’ costs as well as its own. Amendments to
accommodate replacement reference rates can, however, be distinguished from
that situation, being driven by a market-wide change on a timetable which is in
turn driven by financial sector regulators rather than Borrowers. In the US, it is
interesting to note that the LSTA (the LMA equivalent for the US syndicated
loan market) has recommended that Lenders should not be passing the costs of
LIBOR transition amendments on to Borrowers.
Appendix to Part II - Compounding formulae
Schedules 14 (Daily Non-Cumulative Compounded RFR Rate) and 15 Banking Day (the “Cumulated RFR Banking Day”) during that Interest Period
(Cumulative Compounded RFR Rate) of the Compounded/Term MTR (lookback is the result of the below calculation (without rounding, to the extent reasonably
without observation shift) are reproduced below for reference purposes, with practicable for the Finance Party performing the calculation, taking into account
the permission of the LMA. the capabilities of any software used for that purpose):
Schedule 14
Daily Non-Cumulative Compounded RFR Rate
The “Daily Non-Cumulative Compounded RFR Rate” for any RFR Banking Day
“i” during an Interest Period for a Compounded Rate Loan is the percentage rate where:
per annum (without rounding, to the extent reasonably practicable for the Finance
Party performing the calculation, taking into account the capabilities of any “ACCDR” means the Annualised Cumulative Compounded Daily Rate for that
software used for that purpose) calculated as set out below: Cumulated RFR Banking Day;
“tni” means the number of calendar days from, and including, the first day of the
Cumulation Period to, but excluding, the RFR Banking Day which immediately
follows the last day of the Cumulation Period;
where: “Cumulation Period” means the period from, and including, the first RFR Banking
Day of that Interest Period to, and including, that Cumulated RFR Banking Day;
“UCCDRi” means the Unannualised Cumulative Compounded Daily Rate for
that RFR Banking Day “i”; “dcc” has the meaning given to that term above; and
“UCCDRi-1” means, in relation to that RFR Banking Day “i”, the Unannualised the “Annualised Cumulative Compounded Daily Rate” for that Cumulated
Cumulative Compounded Daily Rate for the immediately preceding RFR Banking RFR Banking Day is the percentage rate per annum (rounded to [ ] decimal
Day (if any) during that Interest Period; places) calculated as set out below:
“dcc” means 360 or, in any case where market practice in the Relevant Market is
to use a different number for quoting the number of days in a year, that number;
“ni” means the number of calendar days from, and including, that RFR Banking
Day “i” up to, but excluding, the following RFR Banking Day; and
the “Unannualised Cumulative Compounded Daily Rate” for any RFR
where: Schedule 15
“d0” means the number of RFR Banking Days in the Cumulation Period; Cumulative Compounded RFR Rate
“Cumulation Period” has the meaning given to that term above; The “Cumulative Compounded RFR Rate” for any Interest Period for
a Compounded Rate Loan is the percentage rate per annum (rounded
“i” means a series of whole numbers from one to d0, each representing the to the same number of decimal places as is specified in the definition of
relevant RFR Banking Day in chronological order in the Cumulation Period; “Annualised Cumulative Compounded Daily Rate” in Schedule 14 (Daily
Non-Cumulative Compounded RFR Rate)) calculated as set out below:
“DailyRatei-LP” means, for any RFR Banking Day “i” in the Cumulation Period,
the Daily Rate for the RFR Banking Day which is the applicable Lookback Period
prior to that RFR Banking Day “i”;
“ni” means, for any RFR Banking Day “i” in the Cumulation Period, the number
of calendar days from, and including, that RFR Banking Day “i” up to, but
excluding, the following RFR Banking Day; where:
“dcc” has the meaning given to that term above; and “d0” means the number of RFR Banking Days during the Interest Period;
“i” means a series of whole numbers from one to d0, each representing the
“tni” has the meaning given to that term above.
relevant RFR Banking Day in chronological order during the Interest Period;
“DailyRatei-LP” means for any RFR Banking Day “i” during the Interest Period,
the Daily Rate for the RFR Banking Day which is the applicable Lookback Period
prior to that RFR Banking Day “i”;
“ni” means, for any RFR Banking Day “i”, the number of calendar days from, and
including, that RFR Banking Day “i” up to, but excluding, the following RFR
Banking Day;
“dcc” means 360 or, in any case where market practice in the Relevant Market is
Whilst the LMA has consented to the quotation of, and referral to, parts of the to use a different number for quoting the number of days in a year, that number;
Compounded/Term MTR for the purpose of this Guide, it assumes no responsibility for and
any use to which its documents, or any extract from them, may be put. The views and
options expressed in this Guide are the views of Slaughter and May and the ACT and do “d” means the number of calendar days during that Interest Period.
not necessarily represent those of the LMA. Furthermore, the LMA cannot accept any
responsibility or liability for any error or omission.
© 2021 Loan Market Association. All rights reserved.
PART III –
FURTHER INFORMATION AND KEY CONTACTS Data sources
Further information Bloomberg LIBOR Transition webpage
Letter from UK RFRWG to Bloomberg re. use of BISL CAS in sterling cash markets
Below is a selection of links to further resources on LIBOR transition, which and Bloomberg response (January 2021)
readers may find useful as a supplement to this Guide. Readers should note that UK RFRWG summary of freely available independent RFR calculators
there is a wealth of information and materials available on the transition project, (updated January 2021)
and that the list below is not exhaustive. UK RFRWG summary of the key attributes of beta versions of Term SONIA
Reference Rates (updated January 2021)
ICE SONIA Indexes webpage
General
GBP
FSB resources
FSB Financial benchmarks webpage Useful webpages
FSB Reforming Major Interest Rate Benchmarks: 2020 Progress Report UK RFRWG homepage
(November 2020) Bank of England Transition from LIBOR to risk-free rates webpage
FCA resources Bank of England Key resources for firms transitioning from LIBOR webpage
FCA Transition from LIBOR webpage Bank of England SONIA interest rate benchmark webpage
FCA/PRA Dear CEO letter (26 March 2021)
UK RFRWG statements/publications
FCA announcement on future cessation and loss of representativeness of the LIBOR
benchmarks (5 March 2021) UK RFRWG Recommendations for SONIA Loan Market Conventions (September 2020),
supporting slides (updated March 2021) and worked examples (updated March 2021)
FCA Q&As on conduct risk during LIBOR transition
UK RFRWG Best Practice Guide for GBP Loans (updated March 2021)
FCA webpages on proposed amendments to the Benchmarks Regulation and
its new powers, policy and decision-making UK RFRWG GBP loan market Q&A for the end-Q1 2021 recommended milestone
(February 2021)
UK RFRWG roadmap and priorities (updated April 2021)
Trade associations UK RFRWG paper: Credit adjustment spread methods for active transition
ACT LIBOR hub of GBP LIBOR-referencing loans (December 2020)
LMA LIBOR microsite UK RFRWG Recommendation of credit adjustment spread methodology for fallbacks in
cash market products referencing GBP LIBOR (September 2020)
UK Finance LIBOR transition webpage
ISDA Benchmark Reform and Transition from LIBOR webpage UK RFRWG paper: Use cases of benchmark rates: compounded in arrears,
(includes links to the ISDA IBOR Fallbacks Supplement and Protocol) term rate and further alternatives (January 2020)
USD EUR
Useful webpages Useful webpages
ARRC homepage Working Group on Euro Risk-Free Rates homepage
ARRC Transition from LIBOR webpage ECB euro short-term rate (€STR) webpage
Federal Reserve Bank of New York SOFR webpage Euro Working Group statements/publications
ARRC statements/publications Public consultation on EURIBOR fallback trigger events (November 2020)
ARRC Supplemental drafting for hardwired fallbacks for loans (March 2021) and summary of responses (February 2021)
ARRC progress report on transition from USD LIBOR (March 2021) Public consultation on €STR-based EURIBOR fallback rates (November 2020) and
summary of responses (February 2021)
ARRC guide on the endgame for USD LIBOR (December 2020)
ARRC SOFR “in arrears” conventions for use in bilateral business loans (November 2020)
ARRC recommended best practices for completing the transition from LIBOR (updated CHF
September 2020)
ARRC recommendations regarding more robust fallback language for new originations of
LIBOR bilateral business loans (August 2020) The National Working Group on Swiss Franc Reference Rates homepage
ARRC SOFR “in arrears” conventions for syndicated business loans (July 2020)
ARRC recommendations regarding more robust fallback language for new originations of
LIBOR syndicated loans (June 2020) JPY
ARRC announcement of further details regarding its recommendation of spread
adjustments for cash products (June 2020) Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks homepage
Key Contacts
Association of Corporate Treasurers Sarah Boyce
Associate Policy & Technical Director
The ACT is the chartered professional body for treasury. We work in the
public and the profession’s interest to influence policy and ensure decision +44 (0)207 847 2579
makers understand the impact of proposed changes to regulation and [email protected]
market practice on non-financial corporates.
The ACT participates in many of the IBOR working groups and has been James Winterton
working closely with regulators, fellow trade associations and benchmark Associate Policy & Technical Director
providers to ensure that the needs of the corporate sector and the real
+44 (0)207 847 2578
economy are not overlooked in the transition from LIBOR.
[email protected]
We welcome input from members on all aspects of LIBOR transition by
e-mail to [email protected]
Further information about the ACT is available at www.treasurers.org
Slaughter and May Philip Snell
Partner
Slaughter and May is a leading international law firm that advises on a wide
range of often ground-breaking transactions and has a varied client list that +44 (0)20 7090 3105
includes major corporations, financial institutions and governments. [email protected]
Our team has been actively involved since inception in a number of the
London-based regulatory and industry-led working groups looking at Matthew Tobin
aspects of LIBOR transition. We have been involved in the development of Partner
much of the template documentation that has been prepared for the
purposes of transitioning English law products from LIBOR. +44 (0)20 7090 3445
[email protected]
We are advising many borrower and issuer clients on the current options
for floating rate products. As long-standing advisers to the ACT, we are
supporting its work with corporate treasurers in this area, including its Kathrine Meloni
outreach and information gathering projects.
Special Advisor
Further information about Slaughter and May is available at +44 (0)20 7090 3491
www.slaughterandmay.com.
[email protected]
Contact details for the full Slaughter and May LIBOR transition
Working Group are available on our LIBOR transition webpage.
© Slaughter and May 2021

This Guide has been produced for the ACT by Slaughter and May to provide assistance to treasurers. Its contents do not constitute legal advice. Readers should take
their own professional advice and this Guide should not be relied on as a substitute for such advice. While the ACT and Slaughter and May have taken all reasonable care
in the preparation of this Guide, no responsibility is accepted by Slaughter and May or any of its partners, employees or agents or by the ACT or any of its employees or
representatives for any cost, loss or liability, however caused, occasioned by any person in reliance on it. 161044_ACT Guide for RFR Loans_v09

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THE LMA’S RECOMMENDED

FORMS OF FACILITY AGREEMENT

3.5 Day count conventions, interest calculation 1.2 Trade associations  56

Slaughter and May

NR 31.12.21 NR 31.12.21 NR 31.12.21

NR30.06.23 NR30.06.23 NR30.06.23

NR 31.12.21 NR 31.12.21 NR 31.12.21

LIBOR IBOR/ RFR RFR Working

LIBOR Sterling Overnight Bank of England Working Group on Sterling

LIBOR Secured Overnight Federal Reserve Bank Alternative Reference

LIBOR Euro Short-term European Central Bank (ECB) Working Group

LIBOR Tokyo Overnight Bank of Japan Cross-industry Committee

Source RFR Observation shift Lookback Floors

Sterling Loan SONIA compounded

Consultation on €STR compounded in Apply floor at end of

Minutes of 29.09.20 Apply floor at end of

TONA (Fixing in TONAR compounded in

ISDA IBOR RFR compounded

2.2 Reference Rate Terms 2.3 Alterations to Reference Rate Terms

© 2021 Loan Market Association. All rights reserved.

Further information about the ACT is available at www.treasurers.org

© Slaughter and May 2021

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3.5 Day count conventions, interest calculation 1.2 Trade associations 56