September 15, 2021 - by Ellen Hefferan. Since January 2021, when the LSTA confirms were last revised to support the LIBOR transition, there have been two important developments, namely the emergence of credit sensitive rates and the ARRC’s recommendation of CME’s Term SOFR Rates. Therefore, since the LSTA’s Confirms must support the trading of loans that reference several different benchmarks, on September 13th, the LSTA published revised versions of the Standard Terms and Conditions for the Primary Allocation Confirmation, Par Confirmation and Distressed Confirmation to provide an interim cost of carry solution that would allow for the trading of all non-LIBOR syndicated loans.
Under the revised regime, there are different rates used for the calculation of cost of carry depending on the benchmark of the underlying loan and the currency in which the loan is denominated.
- Trades of LIBOR and Alternate Base Rate (ABR) referenced loans will continue to use average 1M LIBOR – there is no change.
- Trades of daily RFR referenced loans, for example, Daily SOFR or Daily SONIA referenced loans, will calculate cost of carry based on the average of the daily relevant risk-free rates, Daily SOFR or Daily SONIA, respectively in this example.
- Trades of Term SOFR referenced loans will calculate cost of carry using an average of Daily SOFR.
- Trades of credit sensitive rate referenced loans will calculate cost of carry using an average of the daily RFR relevant for the currency in which the debt is denominated. For instance, the trade of a BSBY-referenced USD loan will use average daily SOFR for cost of carry calculations.
- It is not expected that credit sensitive rates would be used in non-USD loans
- For loans referencing any benchmark other than those explicitly addressed in Section 6, cost of carry will be calculated using an average of the daily RFR relevant for the currency in which the debt is denominated.
- However, if, on the last day of the Delay Period, the debt references both a LIBO Rate and any other one or more benchmark rates (other than an ABR for which cost of carry will continue to be calculated using average 1 M LIBOR), cost of carry will be calculated based on the daily average of the relevant risk-free rates.
We are delighted that the trading documents now contemplate the trading of RFR-referenced loans and CSR-referenced loans as an important step in the loan market’s transition away from LIBOR. However having a multitude of cost of carry calculations is cumbersome and suboptimal. To that end, the LSTA Liquidity Committee with the support of the LSTA Board is developing a long-term, streamlined solution with the aim of having a single cost of carry calculation that would be used in all loan trades. Once finalized and operationalized, the LSTA Trade Confirms will be updated again (likely at the end of this year).