The London Interbank Offered Rate (“Libor”) is set to end in 2021.
Libor is the most commonly used benchmark for establishing interest rates on everything from student and car loans to mortgages and credit cards. Countries that rely on Libor include the U.S, Canada, Switzerland and the U.K., but its reach is global. For a U.S. dollar-denominated loan taken anywhere in the world, chances are it will use Libor. The end of Libor is welcomed on many levels by regulators as Libor was tied to some of the banking industry’s biggest scandals leading to roughly $9 billion dollars in fines and the conviction of several bankers for manipulating the rate.
The Alternative Reference Rates Committee (“ARRC”) of the Federal Reserve has developed a replacement for Libor; this replacement is the Secured Overnight Funding Rate (“SOFR”). SOFR is an index that is nearly risk free that reflects a broad measure of overnight U.S. Treasury repurchase financing transactions. The rate is calculated based on transaction data; there is no subjective input. The Federal Reserve will begin publishing SOFR data during the second quarter of 2018.
What to do now?
For already-executed loans that mature by the end of 2021 there is no need to act as loan parties can rely on Libor through the end of 2021.
For already-executed loans that mature after 2021, loan documents should be amended to incorporate appropriate fallback terms. For loans that have not yet been executed, the loan documents should include the appropriate fallback terms.
Appropriate fallback terms refer to language that selects a specific replacement rate or language that clearly delineates which party will choose the replacement rate. A date should be set on which the replacement rate goes into effect under the contract. Language should also be added to allocate any costs or risks associated with relying on the replacement rate in lieu of Libor.
If you are in need of assistance with regards to already-executed loans or loans yet to be executed please contact our office for a free consultation.
Sources:
https://www.bloomberg.com/news/articles/2017-07-27/what-is-libor-and-why-it-will-soon-be-history-quicktake-q-a
Id.
https://www.bloomberg.com/news/articles/2017-07-27/libor-to-end-in-2021-as-fca-says-bank-benchmark-is-untenable-j5m5fepe