The LSTA SOFR Credit Agreement: An Overview
The LSTA SOFR Credit Agreement is a standardized loan documentation framework developed by the Loan Syndications and Trading Association (LSTA) to facilitate the transition from LIBOR to SOFR as the benchmark interest rate for adjustable rate loans. SOFR, or the Secured Overnight Financing Rate, is a new interest rate benchmark that is based on the overnight borrowing costs of banks and is set to replace LIBOR, or the London Interbank Offered Rate, which is being phased out by the end of 2021 due to concerns about its reliability and potential for manipulation.
The LSTA SOFR Credit Agreement is designed to provide a consistent and transparent framework for lenders and borrowers to negotiate, document, and administer loans that are linked to SOFR. It covers a range of loan types, including term loans, revolving credit facilities, and delayed draw loans, and includes provisions for interest rates, prepayment, representations and warranties, and other key terms and conditions.
One of the key features of the LSTA SOFR Credit Agreement is the inclusion of fallback provisions that specify how the loan interest rate will be adjusted in the event that SOFR becomes unavailable or is no longer considered to be a reliable benchmark. These fallback provisions are intended to provide a measure of certainty and stability for lenders and borrowers, even in uncertain market conditions.
Another important aspect of the LSTA SOFR Credit Agreement is the requirement for lenders and borrowers to include a spread adjustment in the loan documentation. This spread adjustment is intended to reflect the difference between LIBOR and SOFR and to ensure that the loan interest rate remains competitive and reflects current market conditions.
Overall, the LSTA SOFR Credit Agreement is an important development in the transition from LIBOR to SOFR as the benchmark interest rate for adjustable rate loans. It provides a standardized framework for lenders and borrowers to negotiate and document loans that are linked to SOFR, and includes important provisions to ensure stability and certainty in the event of market disruptions. For companies and individuals who are considering borrowing in the near future, it is important to understand the significance of this transition and to be familiar with the LSTA SOFR Credit Agreement and its provisions.
