LSTA Offers Guidance on Credit Sensitive Rates to Replace LIBOR

The advisory provides sample language to facilitate the use of credit sensitive rates in hardwired fallback language in new and amended loan documentation.

The LSTA (Loan Syndications & Trading Association) has published a market advisory which addresses adding a ‘credit sensitive rate’ option as part of the LIBOR fallback language included in syndicated loan and bilateral loan documentation.

The advisory provides sample language to facilitate the use of credit sensitive rates in hardwired fallback language for LSTA members who are interested in incorporating a credit sensitive rate option.

Bloomberg, IBA (ICE Benchmark Administration), IHS Markit and the American Financial Exchange (Ameribor) have been administering or developing reference rates with ‘credit sensitive’ elements.

Credit sensitive rates have the opportunity to develop as viable replacements for LIBOR given that 30 June 2023 is the expected cessation date for the most widely used tenors of USD LIBOR for legacy transactions, the LSTA said.

The LSTA said a significant number of its members have shown an interest in credit sensitive rates that are emerging and requested documentation that can account for and accommodate such rates.

In response, the LSTA has developed a slot-in rider that can be incorporated into hardwired fallback language so that such loans may transition, by their terms, to a credit sensitive rate as the preferred rate ahead of, in lieu of, or behind adjusted Term SOFR once the dominant USD LIBOR tenors cease after June 2023.

The language offers two formulations for members to consider: 1) the selection of a specific credit sensitive rate and 2) a preferred hierarchy of credit sensitive rate alternatives.

The LSTA-developed language also is designed to ensure that new or amended loan documentation will have “robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation”, in accordance with the Federal Reserve’s and the OCC’s expectations and guidance.

“Examiners will not criticize banks solely for using a reference rate, including a credit-sensitive rate, other than SOFR for loans,” the November 2020 guidance had said.

The LSTA’s market advisory is available here.

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