Reduce or eliminate interest rate floors Many recent credit agreements have a floor on LIBOR (i

Those provisions arose out of fears that the US government might prohibit LIBOR loans as an attempt by banks to avoid US regulation by online title loans no store visit South Dakota funding themselves outside of the United States

3pound daily SOFR The waterfall in the Refreshed Hard-wired Recommendations provides that the second level of the waterfall is simple SOFR rather than compounded SOFR. The use of simple SOFR may facilitate sales of loans in the secondary market. It is possible that some lenders and some borrowers may prefer compounded SOFR so that the calculation of the interest rate on the loans is consistent with the way SOFR is calculated in any related interest rate hedges.

4. e., if LIBOR is actually less than a specified rate, LIBOR will be deemed to equal the specified rate for purposes of calculating interest). These floors generally range between zero and 1 percent and protect lenders in the event that LIBOR falls below the floor. The Refreshed Hard-wired Recommendations provide that, for purposes of a SOFR-based fallback rate, the sum of SOFR plus the spread adjustment cannot be less than the floor. That is appropriate because the sum of SOFR plus the spread adjustment is the replacement for LIBOR. In negotiating new SOFR credit agreements, borrowers may take the view that whatever floor was agreed to in the context of a LIBOR-priced loan should be reduced (or eliminated) in determining a floor for a SOFR loan since SOFR will almost always be a lower rate than LIBOR. 12

5. Eliminate breakage cost compensation Credit agreements currently provide that if a borrower repays a LIBOR-priced loan on a day other than the last day of an interest period, or if it fails to borrow a LIBOR loan that it requested, it must pay to the lenders any applicable broken funding cost. 13 The obligation to pay breakage for LIBOR-priced loans arose out of the structure of the London interbank market, in which banks made loans by buying certificates of deposit that

did not permit prepayments. Of course, lenders do not now fund themselves in the London interbank market, and borrowers nevertheless agree to pay broken funding compensation as if they did. That notwithstanding, borrowers may well balk at agreeing to breakage provisions when the historical explanation for breakage payments does not exist for a loan priced at a rate based on SOFR. The Draft Simple SOFR Credit Agreement notes that “[i]nclusion of breakage indemnities for SOFR-based loans is an ongoing discussion point in the market.” 14 The Refreshed Hard-wired Recommendations provide that modifications to the broken funding provision are one of the “Benchmark Conforming Changes” that can be made unilaterally by the Administrative Agent. 15

Although the Draft Simple SOFR Credit Agreement includes an illegality provision tied to SOFR loans, 17 it is likely that borrowers will object to an illegality provision for loans priced at an interest rate published by the US government

6. Eliminate yield protection Credit agreements will usually have provisions requiring the borrower to pay additional amounts to a lender to compensate the lender for additional costs it incurs as a result of changes in applicable law (and certain other circumstances). These provisions were originally included in credit agreements because of the loan pricing theory that a lender should be paid its cost of funds (i.e., LIBOR) plus the agreed-upon margin (the “cost-plus” loan pricing theory). Although these provisions now customarily apply to both base rate loans and LIBOR loans, borrowers may object to them being applied to SOFR loans, arguing that since SOFR is not a cost-of-funds rate, the cost-plus pricing theory does not apply to SOFR-priced loans (and that it would be anomalous to ask a borrower to reimburse a lender for an increase in the lenders funding cost when the SOFR-based pricing of the loan is not related to the lenders funding cost).

7. Eliminate illegality provision Although they are becoming less common, 16 some credit agreements still provide that a lender is released from its obligation to lend LIBOR-priced loans if it becomes illegal for the lender to make loans at an interest rate based on LIBOR.