First SORA-based loan in energy sector extended to Sembcorp industries by OCBC Bank
OCBC Bank has extended another SORA (Singapore Overnight Rate Average)-based corporate loan – a S$100 million loan to Sembcorp Financial Services Pte Ltd, a wholly-owned subsidiary of Sembcorp Industries (“Sembcorp”). This is the first SORA-based loan in the energy sector and is another step by OCBC Bank to contribute to Singapore’s development of the SORA markets.
First SORA-based loan in the energy sector
OCBC Bank had previously collaborated with CapitaLand on Singapore’s first SORA-based corporate loan in June and the bank also introduced the first SORA-based retail home loan in July.
The adoption of SORA as an interest rate benchmark for corporate and retail loans has been gaining traction over the past five months. To date, OCBC Bank has extended close to S$1 billion in corporate and retail loans referencing SORA which includes more than S$700m in SORA-based home loans.
This 3-year S$100 million SORA-based loan is part of a S$300 million loan extended to Sembcorp by OCBC Bank.
The loan facility’s interest rate, which references SORA, comprises two components: (1) a compounded average of daily SORA rates calculated in arrears and (2) an applicable margin.
The compounded average SORA will be calculated in arrears, using the ‘five-business day backward-shifted observation period’ methodology.
Mr Graham Cockroft, Group Chief Financial Officer, Sembcorp Industries, said, ” We are delighted to have partnered OCBC to adopt the SORA-based loan, and be a pioneer adopter in the energy industry. Beginning the process early is especially important for corporates like us, where we have multiple loan facilities referencing the various interbank offered rates and SOR, which will eventually transition to their respective new interest rate benchmarks. We look forward to playing an active role to transition smoothly to these new interest rate benchmarks.”
Said Ms Elaine Lam, Head of Global Corporate Banking, OCBC Bank, “We are pleased to support Sembcorp in this transaction which is the first SORA-based loan for the energy sector and a milestone in our decades-long relationship. Sembcorp has taken a leadership role by stepping forward at an early stage as the industry finalises the market conventions. This transaction not only allows Sembcorp and OCBC to have more clarity on operational processes, but it also helps the wider market gain confidence in the benchmark and signals that such loans are commercially viable. This augers well for a smooth transition from SOR to SORA.”
The S$100 million SORA-based loan 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.
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.
How the 3-month Compounded SORA package works
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.