December 16, 2019 - SOFR syndicated loan origination is up and running! Sort of. On Friday, Shell announced a $10 billion SOFR (and sustainability)-linked financing. The $10 billion unsecured loan , led by Bank of America and Barclays, is split into a five-year $8 billion revolver and a one-year $2 billion facility. While the pricing on the loan is not SOFR-based today, the “LIBOR interest will be replaced with SOFR as early as the first anniversary of the signing date of the financing, once the bank market is fully prepared for SOFR as an underlying rate,” according to Refinitiv LPC.
Importantly, this wasn’t a small bilateral test deal. The $10 billion (!) loan boasted 25 banks in the group, including ANZ Banking Group, Bank of China, Banco Santander, BNP Paribas, Citigroup, Credit Agricole CIB, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, ICBC, JP Morgan, Lloyds Bank, Mizuho Bank, Morgan Stanley, Natixis, Royal Bank of Canada, SMBC, Societe Generale, Standard Chartered Bank, TD Securities, UBS and Wells Fargo, Refinitiv LPC added. The breadth of the bank group might indicate that lenders – and borrowers – may start pre-committing to SOFR in loans.
We believe this is an important first step. After all, there are trillions of US dollar syndicated loans outstanding. While most of these loans have “amendment fallback language”, having them all transition to SOFR after LIBOR ceases could entail non-trivial market disruption risk. In contrast, building a SOFR option into a credit agreement that can be utilized when the market is ready to consume the rate may reduce the risk of disruption.
The LSTA is the co-chair of the Alternative Reference Rate Committee’s (ARRC’s) Business Loans Working Group. In that capacity, we have been working to develop broad syndicated loan fallback language and to operationalize SOFR loans. In addition, the LSTA is developing a “SOFR Concept Credit Agreement” to help socialize how loan agreements need to evolve for a SOFR world. LSTA Members should feel free to email us questions at email@example.com and/or join our Weekly LIBOR Q&A call at 3PM (ET) Mondays.