With the London Interbank Offered Rate (LIBOR) ending December 31, 2021, and existing loans by mid-2023, now is the time to review options for new loan terms if you haven’t already done so.
The Federal Reserve Board of Governors, FDIC, and Office of the Comptroller of the Currency issued a joint statement in November 2020 that encouraged banks to move away from LIBOR because of safety and soundness risks.
One of the two biggest issues with LIBOR’s expiration involves fallback language for existing loans. The language will need to be reviewed and potentially amended for when LIBOR rates are discontinued or deemed nonrepresentative.
Agreements often have language for the event LIBOR is not available, including:
- Obtaining quotes from reference banks
- Alternative base rate (often prime rate, which can be significantly higher than LIBOR)
- Replacement index determined by the bond trustee
What does all this mean?
If you haven’t already done so, now is the time to discuss this issue with your lender and identify which rate will be best for you. In addition to Bank Bill Swap Rate (BSBY) and Prime, other options include:
- Treasury Secured Overnight Financing Rate (SOFR): This is recommended by the Federal Reserve Bank of New York’s Alternative Rate Reference Committee. Adoption has been slow, there is no element of credit risk built in, and because it’s based on actual short-term transactions, this means there can be increased volatility but less subjectivity, which is being worked on.
- Ameribor: LIBOR has used this as a proxy for years and is based on what certain banks will lend to each other. It uses actual transactions, which is a characteristic regulators are focused on and have reacted favorably to.
- Bloomberg short-term bank yield rate: This tracks like LIBOR, so some major banks have advocated for it; however, regulators haven’t been as enthusiastic.
The time to negotiate fallback language with your lender for loans that go out past mid-2023 is now. You may lose leverage to negotiate the longer you wait to find a new rate or negotiate fallback language.
Contact us today if you need help navigating next steps.