June 28, 2021 - We knew it was coming, but it is finally happening. On Friday, Refinitiv reported that Ford was looking to refinance $15.4 billion in syndicated facilities – and it plans to do at least some of them on SOFR. While we’ve heard that there have been a number of SOFR bilateral loans, this is the first broadly syndicated multi-billion-dollar US-based SOFR loan we’ve spotted. That said, we fully expected to see an increasing number of loans being originated on reference rates other than LIBOR in the second half of 2021.
Indeed, the announcement should not come as a total surprise: the ARRC recommends that USD LIBOR-based loan originations end by June 30, 2021 and the banking supervisors have said they “believe entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and will examine bank practices accordingly.” The ARRC recommendations are best practices and not enforceable. However, the supervisors’ SR-2027 Letter may carry significant weight.
According to Refinitiv, the Ford loans will be using Daily Simple SOFR in Arrears, which means the daily SOFR rate would be pulled daily from screens but not compounded and then multiplied by the outstanding principal to determine the daily interest accrual. As a helpful reference, the LSTA has published a Daily Simple SOFR/Daily Compounded SOFR Concept Credit Agreement.
While Refinitiv reported that the Ford deal references Simple SOFR, a number of parties in the loan market are eager to use Term SOFR, which is not yet recommended by the ARRC. However, we prepared for this: The LSTA Daily Concept Credit Agreement starts with Simple or Compounded SOFR, but contains a “Flip Forward” to Term SOFR if i) it is available for each tenor, ii) it is administratively feasible, iii) the SOFR Administrator announces that Term SOFR is administered in accordance with IOSCO principles, iv) there have been at least [five] SOFR loans done and/or v) a Relevant Governmental Body has recommended the use of Term SOFR. (Note that the ARRC has indicated it may recommend CME Term SOFR – which is IOSCO compliant – by late summer.) We do not know if the Ford would utilize this flip forward language, but it is a feature that parties have embraced.
Long story short, we believe the Ford may soon do the first of many non-LIBOR loans that will be originated in the second half of the year as the transition process gains steam.