May 25, 2022 - Last week, the ARRC endorsed the use of CME Group’s forward-looking 12-month Term SOFR. While 12-month contracts are not frequently used in business loans – we see more use of 1- and 3-month contracts – LSTA members had been asking whether the ARRC would endorse the 12-month SOFR rate for the syndicated loan space. Punchline: The ARRC has – even if the statement appeared ambiguous.
The ARRC had not endorsed 12-month Term SOFR until now largely because it was waiting until market conditions were sufficiently robust to support the rate. The ARRC noted that it “believes the use of the 12-month CME Term SOFR rate should be primarily directed toward use as part of a fallback in legacy products that reference 12-month LIBOR and in trade or receivables finance.” While this may be unclear, we received comfort that business loans are in scope for 12-month Term SOFR. First, on page 2, the ARRC recommended the same scope of use already laid out in its Best Practice Recommendations, including “the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity – particularly multi-lender facilities, middle market loans, and trade finance loans – where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties.” Second, follow-up discussions with ARRC officials confirmed that 12-month Term SOFR is, indeed, in scope for use in new business loans.