- Landmark SORA-pegged club loan sets the pace for the industry’s future syndicated SORA loans
Global food and agri-business Olam International Limited (Olam) has secured Singapore’s first club loan pegged to the Singapore Overnight Rate Average (SORA) with DBS Bank (DBS) and Industrial and Commercial Bank of China, Singapore Branch (ICBC Singapore).
The SGD200 million one-year committed revolving credit facility is also the industry’s first SORA-pegged club loan coupled with a cross-currency swap.
This gives Olam the option to enter into a SORA cross-currency swap with DBS at the start of each interest period, giving added certainty on interest rates and swap SGD proceeds into USD.
The SGD200 million SORA-pegged club loan and the cross-currency swap marks yet another milestone in the nation’s transition roadmap set out by the Steering Committee for SOR Transition to SORA (SC-STS) towards adopting SORA as the new interest rate benchmark for the Singapore Dollar cash and derivatives markets. Given SORA’s growing importance as a key interest rate benchmark in SGD financial markets, it supports the Association of Banks in Singapore and the Singapore Foreign Exchange Market Committee (ABS-SFEMC)’s efforts to develop new SORA-based markets.
On 30 August 2019, ABS-SFEMC announced that the discontinuation of the London Interbank Offered Rate (LIBOR) would affect the sustainability of the SGD Swap Offer Rate (SOR) and held a public consultation on the use of SORA as the new interest rate benchmark to replace SOR. More recently, the Steering Committee for SOR Transition to SORA (SC-STS) published the response to feedback on 19 March 2020, together with a roadmap for the transition. SORA is a transaction-based interest rate benchmark underpinned by the SGD overnight interbank funding market and has been published by the Monetary Authority of Singapore since July 2005.
Undertaken by Olam with its wholly owned subsidiary, Olam Treasury Pte. Ltd. (OTPL), the SORA-pegged club loan facility’s interest rate comprises two components:
- a compounded daily SORA rate calculated in arrears; and
- an applicable margin.
SORA is a backward-looking overnight rate as compared to forward-looking reference rates commonly used for loan facilities in Singapore, such as the SGD Swap Offer Rate (SOR) where the interest rate is determined at the start of the interest period. To determine the interest rate of a SORA-based loan facility, the daily SORA rates are compounded in arrears and the interest rate is determined by the end of the relevant interest.
Olam’s Managing Director and Group CFO, N Muthukumar, said: “We are delighted to partner DBS and ICBC to pioneer the first SORA-based club-loan facility. This provides Olam with the flexibility to remain adaptable and future-ready itself as we embrace the industry’s shift toward mainstream adoption of the new benchmark for the cash and derivatives market in Singapore.”
Ms Tan Su Shan, Group Head, Institutional Banking Group at DBS, noted that the SORA-pegged club loan adds to industry momentum in the shift towards SORA as the new interest rate benchmark in the cash and derivatives markets.
“We are pleased to be able to work with Olam and ICBC to ink the industry’s first multi-bank SORA-based financing solution. We are also delighted that DBS has been able to lead in readying the SGD loan markets for future SORA-based club and syndicated loan facilities. By adopting SORA-based financing ahead of the market, forward-looking companies such as Olam are positioning themselves well by gaining an early understanding of how SORA works, and how to better tap SORA-based cash and derivatives markets as industry adoption grows and liquidity deepens. We look forward to supporting our clients in the transition. One of the ways we do that is by working with our industry peers to offer SORA-pegged financing solutions as they partner their clients to tap on SORA financing early. We believe that this will help facilitate a smoother transition to the new interest rate benchmark.”
Mr Andrew Ng, Group Head, Treasury & Markets at DBS said that the SORA-USD cross-currency swap shows DBS’ continued commitment to develop innovative SORA-based derivatives. “Developing cross-currency swap solutions help to deepen funding in various currencies including USD and will be critical in the smooth transition to the new benchmark. Working with sophisticated clients like Olam will allow confidence to grow in these products and encourage more participation from other corporates.”
Ms Geng Hao, Deputy General Manager, ICBC Singapore, said “ICBC Singapore is pleased to partner with DBS in providing this SORA-based financing to Olam. Being the first Chinese bank to support this meaningful initiative, ICBC Singapore is committed to supporting MAS’ vision and providing quality banking services to the community.”
Proceeds from the SORA-pegged club loan will be applied towards general corporate purposes of Olam and its subsidiaries. DBS and ICBC have been appointed Mandated Lead Arrangers and DBS is the Sole Bookrunner and Facility Agent for the loan.
The Association of Banks in Singapore, the Singapore Foreign Exchange Market Committee, and the Steering Committee for SOR Transition to SORA, in July 2020 issued a consultation report, titled SIBOR Reform and the Future Landscape of SGD Interest Rate Benchmarks.
The Report recommends the discontinuation of the SGD Singapore Interbank Offered Rate (“SIBOR”) in three to four years, and a shift to the use of the Singapore Overnight Rate Average (“SORA”) as the main interest rate benchmark for SGD financial markets. This shift will support the deepening of SORA markets, result in more transparent loan market pricing for borrowers, and more efficient risk management for lenders.