LMA publishes Rate Switch Exposure Draft for South Africa

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On May 9, 2024 the LMA published the "Exposure Draft SA Rate Switch Agreement" which includes rate switch mechanics from JIBAR to a backward-looking compounded ZARONIA.

The provisions have been published in the LMA's "Investment Grade South African Law Unsecured Single Currency Term and Revolving Facilities Agreement" and are aligned with the market conventions for ZARONIA-linked loans published by the Market Practitioners Group in January 2024. The LMA has emphasized that the provisions are non-binding and, as market practice develops further, it is likely that the LMA will move towards publishing a recommended facilities agreement form that incorporates the rate switch provisions.

The rate switch mechanics as reflected in the current LMA Exposure Draft are structured as automatic upon the occurrence of certain pre-agreed trigger events. These trigger events include, among others, the administrator of JIBAR (i.e., the SARB) becoming insolvent, the SARB publicly announcing that JIBAR has ceased or will cease or has been or will be permanently or indefinitely discontinued, or the SARB publicly announcing that JIBAR is no longer representative of the underlying market and the economic reality that it is intended to measure. In circumstances where such an event occurs, the "Rate Switch Date" occurs and the use of JIBAR is replaced by the relevant Compounded Reference Rate, i.e., ZARONIA, in accordance with the mechanics set out as the new Clause 8A (Rate Switch) of the LMA Exposure Draft.

The LMA Exposure Draft incorporates a "Lookback without Observation Shift" and a non-cumulative compounded methodology for interest calculation. The commercial terms of the replacement reference rate applicable to a particular loan are set out as a schedule to the facilities agreement, and will be agreed between the parties on a case-by-case basis based on the options outlined in the schedule.

The exact date for discontinuation of JIBAR is currently yet to be determined, although the SARB has indicated that this will likely be some time in 2026 (based on the current anticipated timelines). The rate switch mechanics are therefore more appropriate than a complete replacement of JIBAR provisions at this stage.

It is helpful to note that the rate switch mechanics for JIBAR are largely based on the rate switch mechanics, which the LMA prepared in respect of LIBOR at a time when the LIBOR discontinuation date was similarly unknown. Since the complete cessation of LIBOR has now successfully been implemented without too much disruption to the loan market, it is hoped that the transition to ZARONIA will be similarly smooth.

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