The LSTA Credit Agreement SOFR: A Breakdown

The loan market is a constantly evolving industry, and one of the latest changes in the market is the transition from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) as a benchmark rate. SOFR is considered to be more reliable and transparent than LIBOR, which has been subject to manipulation scandals. As a result, many credit agreements have been amended to reflect this change, and the Loan Syndications and Trading Association (LSTA) has developed a standardized Credit Agreement that incorporates SOFR as the benchmark rate.

What is SOFR?

SOFR is a benchmark rate that reflects the cost of borrowing overnight funds secured by U.S. Treasury securities. It was established in 2018 by the Federal Reserve Bank of New York as an alternative to LIBOR. SOFR is a transaction-based rate, which means it is based on actual overnight repurchase agreements in the Treasury market, making it a more reliable and objective benchmark.

What is the LSTA Credit Agreement?

The LSTA Credit Agreement is a standardized agreement that serves as a template for loan transactions in the U.S. leveraged loan market. It is used by many lenders, borrowers, and lawyers in the industry. The LSTA Credit Agreement includes standard terms and provisions that are widely accepted by market participants, as well as optional provisions that can be tailored to the specific needs of the parties involved.

How does the LSTA Credit Agreement incorporate SOFR?

The LSTA Credit Agreement has been updated to incorporate SOFR as the benchmark rate. This means that the interest rate on loans will be based on SOFR instead of LIBOR. The LSTA Credit Agreement includes provisions that specify the calculation of the interest rate based on SOFR, as well as the fallback provisions in case SOFR is unavailable or unreliable. The LSTA Credit Agreement also includes provisions related to the transition from LIBOR to SOFR, such as the timing of the transition and the procedures for amending the Credit Agreement.

Why is the LSTA Credit Agreement important?

The LSTA Credit Agreement is important because it provides a standardized template for loan transactions in the leveraged loan market. It eliminates the need for parties to negotiate and draft a bespoke agreement for each transaction, which can be time-consuming and costly. The LSTA Credit Agreement also incorporates industry best practices and standard provisions, which increases efficiency and reduces the risk of disputes. With the inclusion of SOFR as the benchmark rate, the LSTA Credit Agreement reflects the latest developments in the loan market and ensures consistency across transactions.

Conclusion

The LSTA Credit Agreement is a standardized agreement that reflects the latest developments in the loan market. With the incorporation of SOFR as the benchmark rate, it provides parties with a reliable and transparent benchmark that eliminates the risk of manipulation. As the loan market continues to evolve, the LSTA Credit Agreement will likely be updated to reflect additional changes and developments.

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