Credit Agreement Best Practice – LIBOR Cessation

LIBOR, or the London Interbank Offered Rate, is the underlying reference rate for trillions of dollars of financial products, including loans, bonds and derivatives. Less than 500 days remain before the expected end of LIBOR on December 31, 2021, and there is no suggestion that the COVID-19 pandemic will delay LIBOR's end. 

The secured overnight financing rate (SOFR¹) is expected to be the rate that succeeds U.S. dollar LIBOR for many financial products — although for loans, it is not yet clear which specific SOFR rate will be adopted. The leading contenders appear to be forward-looking term SOFR, which would have a term structure similar to LIBOR (but would require the development of a SOFR futures market), and daily simple SOFR in arrears. Other variants include SOFR compounded in advance and SOFR compounded in arrears — with the latter being the fallback rate selected by ISDA for derivatives. The transition from U.S. dollar LIBOR to SOFR will also involve a