ARRC Releases SOFR “In Arrears” Conventions for Syndicated Business Loans
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”).
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:
Business day lookback with no observation shift;
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;
Actual/360 days used for day count;
“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);
SOFR interest rate rounded to five decimal points and dollar amounts rounded to two decimal points;
Interest rate floors calculated daily;
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;
Utility of a SOFR Index for syndicated business loan may be limited, given the specific conventions recommended; and
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