The Alternative Reference Rates Committee ("ARRC") identified recommended conventions for interest calculations using the daily Secured Overnight Financing Rate ("SOFR") for syndicated business loans. The ARRC's SOFR "in arrears" rates covered by these recommendations are Daily Simple SOFR and Daily Compounded SOFR.
According to the ARRC, the conventions are part of its 2020 Objectives to support the voluntary use of the SOFR and the transition away from the LIBOR (see previous coverage).
The ARRC noted that most of the published conventions are applicable to both SOFR-originated loans and legacy loans that will "fallback" from LIBOR upon its cessation, with the exception of spread adjustments (which will just apply to fallbacks) and floors (which, for fallbacks, would be adjusted to maintain economic parity with the LIBOR floor).
Commentary
The publication of ARRC-recommended conventions for Daily Simple SOFR and Daily Compounded SOFR is another important piece of the puzzle for introduction of SOFR-based loans in the US market, both in newly-originated instruments and as LIBOR fallbacks in existing deals. Coupled with the ARRC's recently published refreshed hardwired fallback language for syndicated business loans, it is clear that the march from LIBOR to SOFR continues apace. The conventions represent many months of hard work between market participants, vendors, regulatory officials and others, ably led by Business Loans Working Group chairs Meredith Coffey (LSTA) and Hu Benton (ABA).
The recommended conventions provide concrete methodologies and practices for operationalizing SOFR loans, including lookback periods, business day conventions, daycounts, rounding, distribution of interest mechanics and other technical requirements for using SOFR. Widespread usage of common ARRC-recommended conventions should yield many benefits to the market, including clarity, commonality and dispute mitigation.
Synchronization and understanding of SOFR conventions is a technical, but critical, step in moving to a replacement benchmark for LIBOR.
Primary Sources
- ARRC Report: SOFR "in Arrears" Conventions for Syndicated Business Loans
- ARRC Press Release: ARRC Releases Conventions Related to Using SOFR in Arrears for Syndicated Loans
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