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Credit Sensitive Rates Appear in Loan Market
Practical Law Legal Update w-031-3248 (Approx. 3 pages)
Credit Sensitive Rates Appear in Loan Market
by Practical Law Finance
| Published on 09 Jun 2021 • USA (National/Federal) |
Credit agreements linked to credit sensitive rates have been spotted in the loan market as market participants show increasing interest in these options as possible replacements to LIBOR.
Although the Alternative Reference Rates Committee (ARRC) previously identified the Secured Overnight Financing Rate (SOFR) as its preferred LIBOR-alternative reference rate, there is growing interest in credit sensitive rates (CSRs) as possible replacements for LIBOR.
On April 8, 2021, the Loan Syndications and Trading Association (LSTA) published a market advisory relating to the inclusion of a CSR option as part of the LIBOR fallback language in syndicated loan and bilateral loan documentation. The advisory relates to LIBOR replacement and provides sample language for a slot-in rider that can be incorporated into hardwired fallback language so that loans may transition to a CSR (see Legal Update, LSTA Publishes Market Advisory Regarding Credit Sensitive Rate Option for LIBOR Fallback Language).
The American Interbank Offered Rate (Ameribor) and Bloomberg Short-Term Bank Yield Index rate (BSBY) are two examples of CSRs discussed in the market:
- Ameribor. Endorsed by the Federal Reserve Chairman as an appropriate alternative benchmark for LIBOR for banks that fund themselves through the American Financial Exchange (AFE) or similar institutions for whom it may reflect their cost of funding. Membership of the AFE includes regional, midsize, and community banks. The CEO of the AFE noted that SOFR and Ameribor are complementary to each other and offer robust alternatives.
- BSBY. Administered by Bloomberg Index Services Limited, BSBY incorporates bank credit spreads and defines a forward term structure. The index is available for five tenors and is calculated each day and published at 8:00 am EST on each US business day.
Examples of credit agreements that have incorporated BSBY rates include:
- Duluth Holdings Inc. (May 14, 2021): At Duluth's option, the interest rate for the revolving loan will be base rate or the BSBY rate, plus the applicable rate specified in the credit agreement; sets a BSBY floor of zero (see also What's Market, Duluth Holdings Inc. credit agreement summary).
- Graham Corporation (June 1, 2021): Interest rate on the line of credit and the term loan will be the sum of the BSBY rate plus the applicable rate specified in the credit agreement; sets a BSBY floor of zero (see also What's Market, Graham Corporation loan agreement summary).
Practical Law Finance will continue to monitor this development. For additional information on LIBOR replacement and successor language, see Practice Note, What's Market: LIBOR Interest Rate Provisions and Loan Agreement LIBOR Fallback Language Toolkit.