Exposure Draft Reference Rate Selection Agreement

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In recent weeks, the Credit Market Association has published draft loan contracts for risk-free interest rates for new transactions and some form of agreement with lenders, which is a first step towards amending LIBOR alternative interest rate loan contracts. The LMA stressed that at this stage the exhibition project should not be seen as a market-binding position for sonia-referenced lending agreements. On this basis, it is considered unlikely in the credit market that, in the near future, full documentation of loan agreements under the proposed debt can be expected. On September 23, 2019, the LMA issued Drafts of Compounded Risk Free Rate Facility Agreements, referring to SONIA and SOFR, the replacement rates selected for LIBOR in the sterling and USD markets. The LMA has published a commentary containing projects inviting market participants to answer various structuring questions that need to be taken into account when adapting to use in online transactions, such as. B: The LMA was careful to stress that the exhibition project should not be treated as standard market documentation. While this is an important step towards what credit documents could be after LIBOR`s shutdown, the draft exposure data also outlines the important steps that UK credit markets must take before LIBOR passes in 2022. Regulators and working groups also point out that credit markets are moving away from credit on libor terms and are beginning to actively cope with the transition to risk-free interest rates such as SONIA. At the end of October, the LMA published its draft selection of benchmark prices. The selection agreement aims to “streamline the transition process” of historical credit transactions documented on LIBOR and to encourage parties to agree on the basic terms of their transition to SONIA before any formal changes. It remains to be seen whether market participants will use the reference rate selection agreement or whether they will move directly towards formal modification of their loan documents.

The reference rate selection agreement alone does not provide the necessary editorial changes, it is a binding summary of the agreed terms, which must be supplemented by a formal amendment agreement, in reference to the specific provisions of each loan agreement. This is stage 1 of a two-step process. It authorizes the agent and the debtor to determine the necessary changes by referring to the forms of risk-free interest rate agreements recommended by the AML, so that only the agent and debtors must enter into the subsequent loan modification agreement, which can facilitate the management of the modification process. In practice, many loan contracts concluded from the market do not require LIBOR to be ignored, that all lenders that have to make changes to move to alternative reference rates instead of introducing a majority authorization for lenders. However, if the lender`s approval under the old credit contract is required, a reference rate selection agreement could be useful in authorizing the agent to approve the amendment agreement without further reference to all lenders.