Client Alert

ARRC Releases SOFR “In Arrears” Conventions for Syndicated Business Loans

August 28, 2020

By Joyce Sophia Xu, Michael Spafford, Diona Park, Daren Stanaway & Matthew Smith

On July 22, 2020, the Alternative Reference Rates Committee (“ARRC”) released recommended conventions related to using the Secured Overnight Financing Rate (“SOFR”) “in arrears” (i.e., calculating interest based on daily SOFR rates published over the course of the relevant interest period and not prior to the start of the interest period) in syndicated business loans (the “Conventions”).[1] The Conventions are generally applicable to both simple SOFR and compounded SOFR structures, which allow for daily calculation of interest accruals in arrears and address new loans that are originated using SOFR as well as legacy loans that have fallback provisions from LIBOR to SOFR when LIBOR has ceased or is declared to be no longer representative. Market participants may adopt the Conventions on a voluntary basis, and the parties may modify for administrative and operational feasibility purposes.

New SOFR Loans

With respect to newly issued SOFR loans, the ARRC acknowledges that syndicated loans may be based on either compound or simple interest and recommends the following specific conventions:

1. Business day lookback with no observation shift;

2. Interest compounded on all SIFMA government securities market business days or simple interest used for all days, with the preceding business day’s rate applied over weekends or holidays;

3. Actual/360 days used for day count;

4. “Modified Following Business Day Convention” (i.e., a non-business day payment date will be adjusted to the next succeeding business day unless that day falls in the next calendar month, in which case the payment date will be the preceding business day);

5. SOFR interest rate rounded to five decimal points and dollar amounts rounded to two decimal points;

6. Interest rate floors calculated daily;

7. Interest calculated on each lender’s share of principal that day and if a lender sells out of the loan completely, they are owed interest during the time they held part of the loan which will not be paid until the end of the relevant interest period;

8. Utility of a SOFR Index for syndicated business loan may be limited, given the specific conventions recommended; and

9. Language for compensating lenders for funding losses may be used.

Legacy LIBOR Loans Converting to SOFR

Additionally, with respect to legacy LIBOR loans that convert to SOFR upon LIBOR cessation or LIBOR being declared unrepresentative, the ARRC noted that most Conventions for new SOFR loans would be applicable, except that: (1) a spread adjustment agreed by the parties would be applied to the fallback rate, and (2) the application of any interest rate floor for LIBOR would be adjusted to apply to SOFR plus the relevant spread adjustment in order maintain economic equivalence.

Publication of the Conventions is in line with the ARRC’s key objectives for 2020 announced on April 17, 2020[2] and follows the ARRC’s publication of its revised hardwired fallback language on June 30, 2020.[3] As noted by ARRC Chairman Tom Wipf, “publication of [the Conventions] marks another important milestone in helping the industry prepare for a world without LIBOR.”[4] With LIBOR’s cessation just around the corner at the end of 2021, market participants are encouraged to consider utilizing the Conventions in newly issued SOFR-based loans and in the fallback provisions in their legacy USD LIBOR loans as soon as possible.

[1]   “SOFR “In Arrears” Conventions for Syndicated Business Loans,” available here.

[2]   “Alternative Reference Rates Committee – 2020 Objectives,” available here

[3]  “ARRC Recommendations Regarding More Robust Fallback Language for New Originations of LIBOR Syndicated Loans,” available here.

[4]  “ARRC Releases Conventions Related to Using SOFR in Arrears for Syndicated Loans,” available here.

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