Each version of „Compounded SOFR“ is determined by the calculation, methodology and conventions defined in the contract definition. The definition of „COMPUNDED SOFR“ in the LSTA concept paper follows the general formula used by the Federal Reserve Bank of NY for the publication of its indicative composite SOFR data and offers a retrospective with change of observation (the length of which must be determined by the parties). A retrospective with an observation layer would move the SOFR observation period so that each rate applies to the renuap transaction period it represents (for example. B the observation period would begin and end two business days before the start and end date of the interest period for a two-day working period). The use of an observational lag has a number of advantages: it applies the correct weighting to daily SOFR rates, it would allow the use of a published compound SOFR index and it is easier to align with the hedges that have set the same observation period. While the use of a „lookback“ with observational lag would allow the use of a published SOFR index, the current definition of „Compounded SOFR“ does not provide for the use of such an index, since such an index is not currently available (see footnote 9 of the draft concept document for more information). The LSTA announced that it would publish the final version of the LSTA`s credit contract after the ARRC released its recommended agreements on business loans.  They will also develop forms of amendments to modify LIBOR reference loans with fallback`s „approach to change“ language, as well as to provide information on compliant changes that can be used in the fallback language of the „hardwired approach“ based on current ARRC waterfall rates.  There are still many moving parts of the LIBOR transition for the syndicated lending market, including the expectation of an easily accessible disclosure on a forward-looking maturity in accordance with IOSO SOFR and a final ARRC agreement on the method of calculating a composite SOFR for use in credit. In the meantime, market participants should think about the sofr interest rate and their preferred methodology and how best to advance the implementation of SOFR in their loans and other financial products.
NEW YORK, November 18 (LPC) – The $1.2 billion U.S. credit market has slowly adjusted to a new benchmark rate for loans, with the London Interbank Offered Rate (Libor) expected to expire in two years, but a U.S. trade group is offering investors a way forward with a new model credit contract. Lenders fully announce all the terms of the loan in a credit agreement. The important credit terms included in the credit agreement include the annual interest rate, the application of interest on outstanding balances, all account-related fees, the duration of the loan, payment terms and possible consequences for late payments. On July 13, 2020, the Loan Syndications – Trading Association („LSTA“) distributed to its primary market committee a final draft concept credit contract (the LSTA credit agreement) that describes a credit term, which refers to the daily financing rate of overnight Secured Overnight (SOFR) or the daily compound SOFR.  The LSTA credit contract was designed to provide a concrete example of new original SOFR benchmark loans and provide an additional instrument for market participants when LIBOR switches.