February 25, 2021 - This week the LSTA circulated an initial draft of the LSTA’s Simple RFR Multicurrency Concept Document. This draft references the relevant risk-free rate (RFR) for each currency contemplated in the document (USD, Sterling, Euro, Japanese Yen and Swiss Franc) and applies that rate on a simple, daily basis. In addition, the draft includes flip forwards for each Term RFR if certain conditions are met – conditions which differ from Term SOFR formulations in the market today in that they do not require that the Term RFR be recommended or selected by a Relevant Governmental Body. Given that such recommendations are not expected across all jurisdictions, we are proposing for member consideration this different, objective set of conditions to determine if a Term RFR Transition Event has occurred. The draft follows the ARRC’s recommended conventions for syndicated business loans – notably it uses a lookback with no observation shift, a daily floor and a daycount of ACT/360 – the approach also adopted in the LSTA’s Daily Simple SOFR Concept Document for USD-denominated loan facilities (available here).
Focus on multicurrency facilities is particularly acute as we approach the end of March. The Bank of England’s Working Group on Sterling Risk Free Rates have released its priorities and roadmap for transition in 2021 which reiterates a key milestone for loan market participants: cessation of new originations of Sterling LIBOR-referencing loans maturing after 2021. While the most direct pressure will be felt by FCA-regulated entities, the intention of the UK regulator is clear – cessation of Sterling LIBOR contracts – and passing this milestone may prove a catalyst to the origination of non-Sterling LIBOR loans outside of the UK. Given the preference of US market participants to use daily simple SOFR (or other RFRs) in the absence of a term rate, we hope that this draft concept document offers a workable illustration of a simple RFR multicurrency facility. We will look to finalize this concept document before the end of March.
If you are interested in reviewing and providing feedback on the draft, kindly submit comments on the draft to Tess Virmani by Monday, March 8th. (When reviewing the draft, please be sure to carefully review all footnotes.) For ease of review, a blackline against the LSTA’s draft LIBOR-referenced multicurrency facility is available here.