Distressed and Special Situations Investing counsel Stacy Tecklin offered her perspective as part of a FinOps Report article offering a three-step best practice approach for the transition from the London Interbank Offered Rate (LIBOR) to alternative reference rates (ARRs). Stacy noted that LIBOR lurks everywhere and that contracts between fund managers and custodian banks about cash collateral reinvestment, securities lending, and sweep account fees warrant review. One example she cited of LIBOR's use was that of a late dividend payment made by a custodian bank to a fund manager client that is tied to LIBOR.
Evaluation is also key. Stacy added, "Syndicated loan market participants should be actively evaluating existing credit agreements for LIBOR replacement options as loan margins and interest rates are directly tied to an investor’s rate of return." She cautions that there are smaller, more isolated contracts that could be affected by LIBOR's transition.
Lastly, Stacy shared that borrowers and lenders can negotiate on new terms for syndicated loans using the Loan Syndications and Trading Association's (LSTA) framework. "While some credit agreements are relying on the amendment approach to adjust to new rates, many new syndicated loan originations can address post-LIBOR benchmark rates using the LSTA's methodology and option of Term or Compound Daily SOFR, either with a built-in adjustment spread or a spread to be determined at the benchmark transition date." ("LIBOR: Transition 1-2-3 in 2022," December 15, 2021)