SORA-SOFR loan – Singapore’s first dual tranche credit secured

Image credit: Harshil Shah (no changes were made to original image)

UOB collaborates with CapitaLand on Singapore’s first dual tranche SORA-SOFR loan

Image credit: Harshil Shah (no changes were made to original image)

United Overseas Bank Limited (UOB) and CapitaLand on September 3rd, announced that they have entered into an agreement for a two-year S$200 million term loan. The dual SORA-SOFR dual tranche loan, which references both the Singapore Overnight Rate Average (SORA) and the Secured Overnight Financing Rate (SOFR), is the first of its kind in Singapore.

The bilateral loan facility between UOB and CapitaLand comes ahead of a global transition from Interbank Offer Rates, including the London Interbank Offer Rate (LIBOR), to alternative risk-free rates (RFRs). As RFRs are overnight interest rate benchmarks based on actual transactions, they are more transparent and more reflective of market conditions. SORA and SOFR have been identified by the relevant regulatory and industry bodies as the alternative benchmark rates to replace the Swap Offer Rate (SOR) in Singapore and the US Dollar LIBOR respectively.

The interest rate on the loan’s SORA-SOFR dual tranche will be based on the compounded averages of daily SORA and SOFR, both calculated in arrears, and with respective applicable margins. The loan proceeds will be used for general corporate purposes.

Mr Leong Yung Chee, Head of Corporate Banking Singapore, UOB, said, “The dual tranche SORA-SOFR loan facility is yet another milestone that reflects the strength of UOB’s longstanding relationship with CapitaLand.

“It is also a major step in driving the adoption of new benchmark rates for financial products in Singapore. We will continue to work closely with the regulators, industry partners and our clients for a smooth transition process.”

Mr Andrew Lim, Group Chief Financial Officer, CapitaLand Group, said, “With our first SORA-SOFR dual tranche structure, CapitaLand continues to proactively prepare for the global transition to alternative benchmark rates. As a globally diversified real estate company, CapitaLand’s early adoption of these new interest rate benchmarks across different currencies enables us to work with our key banking partners such as UOB, to ensure that the Group’s ongoing transition of our loan book to alternative benchmark rates proceeds smoothly.”

Through this collaboration of SORA-SOFR dual tranche structure, UOB and CapitaLand aim to enhance market confidence in adopting SORA, which will in turn help accelerate the transition from the use of SOR to SORA. This is in line with the Monetary Authority of Singapore’s initiatives to support the adoption of SORA as a key interest rate benchmark in Singapore and the development of vibrant and robust SORA markets\.

In June 2020, CapitaLand was the first company in Singapore to obtain a SORA-based loan and continues to pave the way for greater market acceptance of SORA- and SOFR-based interest rate benchmarks.

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.

The SORA-based loan facility’s interest rate, which references SORA, comprises two components: (1) a compounded daily SORA rate calculated in arrears and (2) 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 period.

How the 3-month Compounded SORA package will work 

MAS publishes SORA for a given business day in Singapore by 9.00am on the next business day in Singapore. Alongside SORA, the Compounded SORA rates for the 1-month, 3-month and 6-month tenors are also published.

The OCBC 3-month Compounded SORA Package will reference the 3-month Compounded SORA rate, published by MAS, to compute the monthly loan instalment. The rate will be updated every month instead of every three months as is the case for the 3-month SIBOR-based home loan.

The first applicable 3-month Compounded SORA rate will be the one published by MAS on the date that the bank disburses the loan, and will apply for a period of one month. If the 3-month Compounded SORA is less than zero, zero will be applied.

For each subsequent 1-month period, the applicable 3-month Compounded SORA will be the rate published by MAS on the first day of the 1-month period (rate review date) and will apply for such subsequent 1-month period.

This provides certainty to the customer as the customer will be notified at the start of the month of the applicable interest rate and instalment amount that will be charged at the end of the month. This arrangement helps the customer better plan his or her finances.

The 3-month Compounded SORA rate applicable on a Saturday, Sunday and Public Holiday would be the last published 3-month Compounded SORA rate. For example, if the rate review date falls on a weekend, the 3-month Compounded SORA rate applied for the next 1-month period would be the 3-month Compounded SORA rate published on the working Friday of that week.

Written by Ravi Chandran

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