Ready Or Not, Here It Comes…LIBOR To SOFR Transition!
Borrowers that always relied on LIBOR in their debt and derivative contracts need to prepare for a world without LIBOR. We want you to be ready! Let’s go over why, when and what you should know.
WHY IS LIBOR GOING AWAY? The LIBOR rate is being replaced because industry experts have started seeking LIBOR alternatives, due to changes in the rate’s transparency and reliability. Over time, the underlying market that determines LIBOR has stopped having a significant transaction volume, because it was based on the judgement of a panel of banks rather than on actual market data, impacting its credibility
WHEN WILL THE TRANSITION HAPPEN? The 1st phase will be in effect on December 31, 2021. This is when you will see, or I should see “not see” the publishing of 1-week and 2-month LIBOR rates. The 2nd phase discontinues the 1-month, 3-month, 6-month and 12-month LIBOR rates as of June 30, 2023.
WHAT SHOULD I BE DOING?
1. Take inventory of existing commercial loans to determine which have interest rates that are based in whole or in part on LIBOR.
2. Speak to your lender about what the alternatives are, what changes need to be made and what it will cost to implement those changes.
3. Find out if any of your loan(s) have a LIBOR floor, so that any spread adjustment, when factored into the new index results in the same or substantially the same monthly payment as it did with the LIBOR rate.
How will existing transactions and contracts be affected? Transactions that reference LIBOR and mature or expire after the time LIBOR becomes unavailable, will need to be amended. Your lender will reach out to you to amend your contract, if they have not done so already.
LIBOR vs SOFR:
- LIBOR is an unsecured rate and represents the bank’s estimate as to their cost of funds
- SOFR is a secured, risk-free rate
- Assess your current portfolio
- Discuss your options
- Be smart about reference rate language in new transactions
- Stay current on market trends
- Don’t panic, prepare
Unlike LIBOR, SOFR is a fully transaction-based rate and therefore, less susceptible to market manipulation and more attractive to regulators. SOFR measures the cost of borrowing cash overnight collateralized by Treasury securities.
Our team is here to help you quantify any impact the LIBOR to SOFR transition may have on your portfolio. Contact us for a free consultation to guide you through taking the best steps forward.