Trends in SOFR Spread Adjustments and Rate Floors

The ARRC recommends using the five-year historical median difference between LIBOR and SOFR (set on March 5, 2021) as the default spread adjustment. However, Practical Guidance’s Market Standards shows that most recent deals have trended away from using the AARC's recommended spread adjustment.

Market Standards is a searchable database of publicly filed credit agreements and commitment letters enabling users to search, compare, and analyze credit agreements using approximately 90 detailed deal points and commitment letters using approximately 70 deal points to filter search results.

Click here to access credit agreements on Market Standards

According to data from Market Standards:

• Out of 100 deals reviewed since May 2022, none of the credit agreements included the AARC recommended spread adjustment. Most deals analyzed used a flat credit spread adjustment of 0.10% (10 bps) for Term SOFR.
• 13 out of 100 deals used a spread adjustment based on two or more of the interest (e.g., one month (10 bps), three months (15 bps), and six months (25 bps)), but since June 2022, most deals included a flat spread adjustment of 10 bps. See Sunpower Corporation and Trex Company, Inc.
• Eight deals out of 100 had no spread adjustment. See Verisk Analytics, Inc., Malibu Boats, LLC, and Take-Two Interactive Software, Inc.
• A recent deal reviewed provides that if the administrative agent and the borrower subsequently determine that credit spread adjustments are not being required generally in SOFR-based term loan A facilities for similarly rated borrowers, the term SOFR adjustment will be reduced to 0.00% for subsequent interest periods. See GLP Capital L.P.
• The benchmark rate floor for term SOFR loans typically is 0%. However, a few deals included a floor of .5% or 1%, or other alternative floor for term SOFR loans. See 8x8, Inc.

For more information, see our Credit Spread Adjustment Tracker.

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Related Content

• LIBOR Transition to SOFR in Credit Agreements
  Read this practice note describing the replacement of LIBOR as the baseline reference interest rate under credit agreements. 

• Alternative Reference Rate Loans Tracker
  Check out this tracker identifying new publicly filed loans with interest rates based on reference rates other than SOFR or LIBOR from the first half of 2021 through the present.

• LIBOR Replacement Checklist
  Use this checklist of issues to consider in implementing and documenting non-LIBOR interest rates in commercial loan transactions. This checklist serves as a general guideline for counsel representing a party in a commercial loan to be used along with consideration of transaction-specific issues.

Practical Guidance Updates
Featuring the latest updates from your Practical Guidance account.

• Market Standards Highlights:
  • AvalonBay Communities, Inc. On September 27, 2022, AvalonBay Communities, Inc. (“Avalon”) entered into a $2.25 billion Sixth Amended and Restated Revolving Loan Agreement (the “Credit Facility”) with Bank of America, N.A., as administrative agent. The Credit Facility replaces Avalon’s $1.75 billion credit facility dated February 28, 2019. The term of the Credit Facility, unless extended, ends on September 27, 2026. The Credit Facility bears interest at varying levels based on SOFR. The stated spread over SOFR can vary from SOFR plus 0.65% to SOFR plus 1.40%.
    
    Notable Provisions: (1) The Credit Facility includes sustainability adjustments for meeting or missing GHG emissions reduction targets (for more information, see Sustainability-Linked Loans Tracker) and (2) The Credit Facility also includes a competitive bid loan procedure in Section 2.02 (for more information on competitive bid loans, see Market Trends 2020/21: Competitive Bid Loan Provisions, Tranches of Loans and Loan Mechanics in Credit Agreements, and Competitive Bid Loan Promissory Note (Credit Agreement)).

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