What are the principal features of the draft facilities agreements based on compounded SONIA and SOFR published by the LMA?

What are the principal features of the draft facilities agreements based on compounded SONIA and SOFR published by the LMA?

The Loan Market Association (LMA) has published draft facilities agreements based on compounded SONIA and compounded SOFR. This News Analysis looks at the background to the publication of the documents and provides an overview of the draft provisions and issues raised.

What have the LMA published and why?

On 23 September 2019, the LMA published exposure drafts of compounded risk-free rate facility agreements for sterling and US dollars (the ‘Exposure Drafts’). The Exposure Drafts have been prepared by LMA in order to assist the market to prepare for the transition away from LIBOR to risk-free rates (RFRs).

The current lack of a suitable forward-looking term rate and the likely preference of some market participants for a product based on compounded risk-free rates mean that development of a lending product and documentation based on compounded RFRs is an important step in the transition.

The main purpose of the Exposure Drafts is to facilitate awareness and consideration of some of the structuring issues that have emerged by framing them in their documentary context.

Alongside the Exposure Drafts themselves, the LMA has published a detailed commentary document. This discusses the key areas of difference between the standard LMA Primary Documents and the Exposure Drafts. For each area identified, the commentary sets out the following:

  • the background issues relating to that area 
  • the framework adopted in relation to that area in the Exposure Drafts, and 
  • a summary of some key commercial issues in relation to that area for market participants considering the structuring of syndicated loans referencing SOFR or SONIA

What are the principal features of the Exposure Drafts?

The Exposure Drafts are structured as single currency US dollar/ Sterling denominated term and revolving facilities agreements.

Instead of interest for any given interest period being based on Sterling/US dollar LIBOR (as in existing standard form documentation), interest is determined by reference to a compounded average of SONIA/SOFR (as applicable).

That compounded average of SONIA/SOFR is calculated on an in arrear basis over an observation period starting before the start

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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.