It has been a busy week in the loan market. The LIBOR transition is accelerating daily, we have a new form of LSTA credit agreement, and what was considered an “existential threat” to the syndicated loan market has emerged again. Here is the recap.
1. The switch to SOFR is in full swing
Over the past few weeks, we have seen banks launch and refinance SOFR-based loans at an accelerated pace. There were a number of large loans in the leveraged space that exceeded LIBOR and became SOFR first in October.
The Alternative Reference Rates Committee (ARRC) hosted a symposium last week, the sixth in a series on the transition from LIBOR to SOFR. Acting Currency Comptroller Michael Hsu spoke about the transition away from LIBOR. Banks and borrowers have also weighed on how they make efforts to keep pace with the direction that no new LIBOR loans are issued after December 31 of this year. As a reminder, market participants are expected to stop making LIBOR-based loans by the end of this year, although existing credit agreements may continue to use LIBOR as a relevant benchmark, so that There will still be drawdowns on LIBOR-based loans until 2022.
Various banks have intervened on their status in the transition. Some banks have clear sell-off dates on LIBOR-based loans that have already come and gone this year. Others are a bit slower in the transition. Despite indications of the end of origination, many banks believe that they did not fully embrace the SOFR transition until the ARRC approved the SOFR term in late July. Given that this was just a few months ago, the pace of SOFR-based loan issuance is actually considered by some to be quite impressive.
We see a number of SOFR-first termsheets and SOFR-first agreements, so it’s safe to say SOFR has arrived in fund financing.
2. LSTA has a new shape
This week, the Loan Syndications and Trading Association (the “LSTA”) distributed to its members its new form of revolving credit facility, which updated the full form of revolving credit facility that was first issued in 2017 Prior to that date, the LSTA had “Model Credit Agreement Provisions,” a library of standard provisions for a credit agreement, but had not previously offered its members a full credit agreement.
The credit agreement in the form of an LSTA establishes a baseline for the market situation with regard to the rights and obligations of the parties to a financing transaction. The parties can often agree that they will follow the “LSTA standard” for certain parts of their credit agreement.
With respect to the revised agreement, the changes cover several topics, but, significantly, there are updated provisions that relate to the LIBOR transition and include a hard-wired fallback language. This is important for many market participants, because while some banks have developed their own language for the transition, many other banks and their boards rely heavily on the model language produced by the LSTA.
Other important changes relate to the provisions relating to letters of credit. Additional changes include updates to the ERISA and Bail-In provisions, as well as standard language for US QFC stay rules.
Cadwalader’s financial partners, Chris McDermott and Jeff Nagle, acted as external advisers to LSTA on this project.
3. Litigation Update – Are Loans Securities?
The question of whether syndicated loans constitute securities under federal and state securities laws has arisen at various points for decades. The issue was raised again in a case in New York City federal district court. In this latest case to ask this question, a Millennium bankruptcy litigation trust sued agent banks who took out a $ 1.75 billion loan to the debtor and alleged that the agent banks had breached the state securities laws when granting these loans. The banks sought to close the case on the grounds, among other things, that the loans are not securities. The district court granted a motion to dismiss in 2020, and the plaintiff subsequently filed another petition practice which exhausted its remedies in that court. They have now taken the case, including issues relating to state (and, by extension, federal) securities laws to the Second Circuit Court of Appeals.
The LSTA warned that viewing these loans as securities could pose an “existential threat” to agency business and the lending market as a whole. The LSTA filed an amicus brief in the district court and could potentially be involved in the appeal. We could also see federal regulators being asked to step in. We will follow that up.