Credit agreements tied to the Secured Overnight Financing Rate (SOFR) have been spotted in the loan market as market participants move ahead in transitioning away from LIBOR.

US federal agencies have been encouraging lenders to stop entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. The Alternative Reference Rates Committee (ARRC) previously identified SOFR as its preferred LIBOR-alternative reference rate and announced its formal recommendation of forward-looking SOFR term rates produced by the CME Group, Inc. in July 2021 (see Legal Update, ARRC Formally Recommends Forward-Looking SOFR Term Rate).

Market observers have been anticipating the arrival of SOFR-based syndicated loans for some time. According to a report from Refinitiv published earlier this year, Ford Motor Co. (Ford) hinted it was looking to tie its loan to SOFR when it refinanced its existing credit facilities in the fall. Ford executed these deals in September (Third Amendment to Credit Agreement and 18^th Amendment to Credit Agreement). The loans are linked to Daily Simple SOFR.

Several other borrowers have also tied their interest rates in recent credit agreements and credit agreement amendments to Daily Simple SOFR, including the:

According to market observers, the last quarter of 2021 is likely to show an uptick in origination of non-LIBOR loans as we get closer to the December 31 regulator deadline. SOFR-based rates are not the only alternative rates in consideration. As previously reported, there is also growing interest in credit sensitive rates (like the Bloomberg Short-Term Bank Yield Index rate (BSBY)) as possible replacements for LIBOR (see Legal Update, Credit Sensitive Rates Appear in Loan Market. For examples of BSBY-linked loans, see Duluth Holdings Inc., ServiceSource International, Inc. and FreedomRoads, LLC credit agreements). Practical Law Finance will continue to monitor this development.

For further information on LIBOR replacement and benchmark fallbacks, see Practical Law's LIBOR Replacement Toolkit.