October 14, 2020 - As the financial markets transition from LIBOR to the recommended appropriate risk-free rates (“RFRs”), the reference to “Average LIBO Rate” used in the calculation of “cost of carry” for delayed compensation will have to change. LIBOR-referenced facilities should continue to use LIBOR-based cost of carry but RFR-referenced facilities should base the relevant cost of carry calculations on the respective RFR.  RFR-based cost of carry will be calculated on a simple, daily basis during the Delay Period employing a 5 Business Day Lookback regardless of the Lookback period of the facility as set forth in the Credit Agreement.

We thought it would be worthwhile to illustrate how cost of carry will be calculated for a variety of trades in which the underlying facility is earning a RFR.  Note that all calculations are subject to a 5 Business Day Lookback. 

1. Cost of carry for a USD facility:  On the Commencement Date, calculate the Purchase Price and determine cost of carry based on SOFR calculated on a daily basis during the Delay Period.
2.  Cost of Carry for a non-USD facility:  On the Commencement Date, calculate the Purchase Price in the currency of the facility and determine cost of carry based on the RFR of that currency, calculated on a daily basis during the Delay Period. For example, if the trade is a GBP facility, then cost of carry is based on SONIA.
3. Cost of carry for multiple facilities, each in different currencies:  On the Commencement Date, calculate the Purchase Price separately for each facility in its respective currency and determine cost of carry for each facility based on its respective RFR, calculated on a daily basis during the Delay Period.    
4. Cost of carry for one multicurrency facility:  On the Commencement Date, convert the Purchase Price in each of the multiple currencies to one Purchase Price in the Master Currency of the facility and determine cost of carry based on the RFR of the Master Currency, calculated on a daily basis during the Delay Period.
5. Cost of carry for a facility with multiple contracts, one more earning LIBOR and one or more earning the RFR, e.g. SOFR:  On the Commencement Date, calculate the Purchase Price and determine the entire cost of carry based on SOFR calculated on a daily basis during the Delay Period.  Do not continue to calculate a portion of the cost of carry using LIBOR, regardless of the underlying LIBOR contract(s). 
6. As is the case today, floors will not apply to the cost of carry calculation when based on the RFR. 
7. If a facility is unfunded:  On the Commencement Date, calculate the Purchase Price in the currency of the facility (or the Master Currency if there are more than one) and determine cost of carry based on the RFR of that currency (or the RFR of the Master Currency, if applicable) calculated on a daily basis during the Delay Period.
8. The “25% rule” remains in effect, meaning that if Purchase Price (without adjustment for delayed comp, Assignment Fees or Consent to Transfer Fees (the “Gross Purchase Price”)) calculated on the Delayed Settlement Date has increased or decreased more than 25% from the Purchase Price calculated on the Commencement Date, then the cost of carry shall be calculated based on the Gross Purchase Price so calculated on each day during the Delay Period

If you have any questions, please contact Ellen Hefferan.