In our article from September 15, 2022, we discussed the announcement made by Refinitiv Benchmark Services Limited (RBSL), the benchmark administrator of the Canadian Dollar Offered Rate (CDOR), for the permanent cessation of publication of all tenors of CDOR after June 28, 2024 (the CDOR Cessation Date). We also discussed the recommendations contained in the Canadian Alternative Reference Rate Working Group's (the CARR) White Paper published on the December 16, 2021, specifically that (i) the RBSL permanently discontinue the calculation and publication of CDOR, and (ii) the adoption by Canadian loan market participants of the Canadian Overnight Repo Rate Average (CORRA) as the replacement rate for CDOR. These recommendations are intended to align Canadian lending practices with the practices adopted in other jurisdictions, consistent with recent global benchmark reform initiatives.
"No new CDOR or BA loans"
On July 27, 2023, the CARR published its recommendations for transitioning loans from CDOR to CORRA and provided a "no new CDOR or BA loans" milestone (the Milestone Date) that established November 1, 2023, as the date upon which no new CDOR or banker's acceptance (BA) referencing loan contracts should be entered into. For the purpose of the Milestone Date, "new contracts" include:
- New agreements created after November 1, 2023, that create additional CDOR or BA loan exposure; and
- Material amendments to existing agreements, such as pricing changes, term extensions that require lender consent, and facility amount increases.
The Milestone Date was introduced by the CARR to encourage a tapered transition and minimize the risk for the Canadian loan market by reducing the stock of loans that need to be remediated ahead of the CDOR Cessation Date. More recently, on October 24, 2023, the Office of the Superintendent of Financial Institutions (OSFI) published an industry letter whereby it expressed support for the CARR's "no new CDOR or BA loans" milestone and reiterated the importance of federally regulated financial institutions to actively transition their loans away from CDOR.
As a point of clarity, it should be noted, the ability to draw on existing CDOR or BA loan facilities that have not yet matured, been extended, or incurred material amendments prior to November 1, 2023, is not impacted by the Milestone Date.
New best practices, definitions and mechanics published by the CARR
As mentioned in our preceding article, the CARR published recommended fallback language (the Recommended Fallback Language) to encourage Canadian loan market participants to take preliminary steps to transition their credit facility documentation to CORRA. Concurrently with the introduction of the Milestone Date, the CARR published a set of best practices (the CORRA Transition Best Practices) and recommended CORRA loan definitions and mechanics (CORRA Definitions and Mechanics), designed to assist Canadian loan market participants in preparing and transitioning their loans to CORRA in advance of the CDOR Cessation Date. In the CORRA Transition Best Practices, the CARR has specified that "[the Recommended Fallback Language] is intended to be an intermediate step and applicable in the event a loan cannot be transitioned in time...Relying on the Fallback provisions is not a best practice and should be avoided."
CORRA Loan Agreement Definitions and Mechanics
The CORRA Definitions and Mechanics were published by the CARR to provide recommended provisions and definitions for inclusion in new or existing credit agreements which will provide for CORRA-based loans. These provisions contain the loan mechanics necessary for a CORRA-based loan to operate. It is further recommended that the CORRA Definitions and Mechanics be considered in conjunction with the CARR Loan Convention Comparison Table and the CORRA Transition Best Practices.
Notable provisions of the CORRA Loan Agreement Definitions and Mechanics
The right to rate flip
Within the CORRA Definitions and Mechanics, the CARR has introduced a "rate flip" mechanism, giving borrowers the ability to switch between paying loan interest based on either Compounded CORRA or Term CORRA. Throughout the entirety of the loan, borrowers have this ability to flip between Compounded CORRA and Term CORRA, as permitted by the credit agreement, without having to make continual amendments to the credit agreement. There is no analogous provision in the SOFR language adopted by the market. It is anticipated that this right may be requested by borrowers who, over time, may have come to prefer one of these two CORRA availments to address their funding needs.
Benchmark replacement mechanics
In the wake of recent global benchmark reform, it has become more common in the lending market to build in evergreen benchmark replacement mechanics to provide for fallback language in the event that a new benchmark becomes subject to discontinuation at a later date. To address this issue for CORRA, the CORRA Definitions and Mechanics contains recommended benchmark replacement provisions which allows parties to select a successor rate following consideration of the market convention at such time.
The CARR recommended best practices for Canadian loan market participants
The CORRA Transition Best Practices include recommended practices for the remediation existing CDOR and BA loan exposure. The recommendations include factors and considerations that market participants are no doubt familiar with in the context of other recent benchmark transitions, including that market participants: (i) evaluate the scope of their potential exposure to CDOR and BAs, (ii) identify fallback language in existing contracts, and consider whether amendments are necessary, (iii) familiarize themselves with the CORRA rate and methodologies, and (iv) consider the impact of the transition on any related hedging instruments.
A special thank you to Zehan Jagosh (articling student) for his assistance with this article.
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