Exposure draft of a reference rate selection agreement for use in relation to legacy transactions and the transition to alternative reference rates

Exposure draft of a reference rate selection agreement for use in relation to legacy transactions and the transition to alternative reference rates

On 25 October 2019, the LMA published an exposure draft of a reference rate selection agreement for use in relation to legacy transactions and the transition to alternative reference rates. The purpose of the reference rate selection agreement is to streamline the process of transition to alternative reference rate(s) through the use of the same form of agreement on different transactions. Key points to note on the draft reference rate selection agreement are:

  • the agreement is being published as an exposure draft only and its primary purpose is to act as a focal point for market participants for the documentary mechanics and issues that will need to be determined when transitioning syndicated loan transactions referencing existing reference rate(s) to alternative reference rate(s) 
  • a two stage amendment process is envisaged - execution of the draft reference rate selection agreement constitutes the first stage and is effectively an agreement setting out the basic terms of the amendments to the facilities agreement to reflect use of a new rate; this is followed by the execution of an amendment agreement setting out the changes in detail 
  • the draft reference rate selection agreement is itself split into three parts: 
    • the first part provides a short summary of the agreement and the signature pages -  depending on the terms of the underlying facilities agreement, the obligors and either all lenders, or majority lenders, would need to execute the agreement.  However, the lenders agree that the agent is authorised to determine and implement amendments to the facilities agreement relating to the transition from the existing rate to that selected in the agreement 
    • the second part constitutes a Selection Sheet; this sets out the basic terms applicable to the alternative reference rate(s) and the options which the parties may select and is in a tick box format. Note that the options in the Selection Sheet currently correspond to the options or terms for interest rate provisions set out in the exposure drafts of compounded risk-free rate facility agreements for sterling and US dollars published by the LMA on 23 September 2019 
    • the third part of the agreement sets out the terms and conditions applicable to the selection of the rate

The advantage of the process is that it is not necessary to get all lenders to review and sign the full amendment agreement. The LMA notes, however, that parties may prefer that all lenders enter into the full amendment agreement. Alternatively, the LMA suggests that users may determine that a further amendment agreement is unnecessary and that, pursuant to the reference rate selection agreement, amendments would be deemed to be made to the underlying facility agreement in line with the provisions of the appropriate recommended form of LMA syndicated facility agreement.

The LMA is looking for feedback from market participants on the reference rate selection agreement and particularly that arising from experiences relating to transition issues on transactions. 


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About the author:

Miranda is a solicitor specialising in leveraged and acquisition finance. She trained at Hogan Lovells International LLP and qualified into the international banking and finance team. During her time at Hogan Lovells she worked on a variety of domestic and cross-border transactions, acting for both borrowers and lenders. She also experienced secondments to Barclays Bank PLC and Kaupthing Bank hf.