December 15, 2020 - As the financial markets transition from LIBOR to the recommended appropriate risk-free rates (“RFRs”), the reference to “Average LIBO Rate” used in the calculation of “cost of carry” for delayed compensation will have to change. While LIBOR-referenced facilities continue to use LIBOR-based cost of carry, RFR-referenced facilities will base the relevant cost of carry calculations on the respective “Average RFR”. This means that when the Debt references a RFR as the applicable benchmark rate of interest as of the last day of the Delay Period, the RFR cost of carry rate is calculated by taking (a) the sum of all the individual applicable RFRs for each day in the period from (and including) the date five (5) Business Days before the Commencement Date and to (but excluding) the date that is five (5) Business Days before the Delayed Settlement Date and (b) dividing by the total number of days in such period. Note that the 5 Business Day Lookback is applied in all cases regardless of the Lookback period of the facility as set forth in the Credit Agreement.    

We thought it would be worthwhile to illustrate how cost of carry will be calculated for a variety of trades in which the underlying facility is earning a RFR. 

1) Cost of carry for a USD facility:  On the Commencement Date, calculate the Purchase Price and determine cost of carry based on the Average SOFR during the Delay Period.

2) Cost of Carry for a non-USD facility:  On the Commencement Date, calculate the Purchase Price in the currency of the facility and determine cost of carry based on the Average RFR of that currency, calculated during the Delay Period.   For example, if the trade is a GBP facility, then cost of carry is based on Average SONIA.

3) Cost of carry for multiple facilities, each in different currencies:  On the Commencement Date, calculate the Purchase Price separately for each facility in its respective currency and determine cost of carry for each facility based on its respective Average RFR during the Delay Period.    

4) Cost of carry for one multicurrency facility:  On the Commencement Date, convert the Purchase Price in each of the multiple currencies to one Purchase Price in the Master Currency of the facility and determine cost of carry based on the Average RFR of the Master Currency during the Delay Period. 

5) Cost of carry for a facility with multiple contracts, one more earning LIBOR and one or more earning the RFR, e.g. SOFR:  On the Commencement Date, calculate the Purchase Price and determine the entire cost of carry based on Average SOFR calculated during the Delay Period.  Do not continue to calculate a portion of the cost of carry using LIBOR, regardless of the underlying LIBOR contract(s).         

6) As is the case today, floors will not apply to the cost of carry calculation when based on the RFR.  

7) If a facility is unfunded:  On the Commencement Date, calculate the Purchase Price in the currency of the facility (or the Master Currency if there are more than one) and determine cost of carry based on the Average RFR of that currency (or the RFR of the Master Currency, if applicable) calculated during the Delay Period. 

8) The “25% rule” remains in effect, meaning that if Purchase Price (without adjustment for delayed comp, Assignment Fees or Consent to Transfer Fees (the “Gross Purchase Price”)) calculated on the Delayed Settlement Date has increased or decreased more than 25% from the Purchase Price calculated on the Commencement Date, then the cost of carry shall be calculated based on the Gross Purchase Price so calculated on each day during the Delay Period using the Average RFR for the Delay Period.  

If you have any questions, please contact Ellen Hefferan.

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