By Debra Hogan

Changes are fast approaching and here is what you need to be aware of.

Why the changes? After the 2008 financial crisis and later in 2012, it was found that banks had the ability to manipulate the LIBOR rate. Due to this, the Federal Reserve Board put together a team called the Alternative Reference Rate Committee (ARRC) to find alternatives.

London Inter Bank Offered Rate (LIBOR) is the overnight borrowing costs to banks. It is calculated from an average of banks that participate in overnight lending to each other.

Secured Overnight Financial Rate (SOFR) is the actual cost of lending and borrowing in all markets, and it is collateralized by Treasury securities. It is volatile at month end, quarter end, and year end. April 1, 2018 was the first valuation date.

Bloomberg Short Term Bank Yield Index (BSBY) is a proprietary index calculated daily and published at 7:00 am (EST) on each U.S. business day. The index has been developed to address the needs of the market by providing a series of credit sensitive reference rates that incorporate bank credit spreads and defines a forward term structure. BSBY seeks to measure the average yields at which large global banks access USD senior unsecured marginal wholesale funding. (Bloomberg Professional Services)

LIBOR & SOFR: The Differences

LIBOR & SOFR: The International Changes

  • UK: SONIA – Reformed Sterling Overnight Index Average
  • Japan: TONA – Tokyo Overnight Average Rate
  • EU: ESTER – Euro Short-Term Rate
  • Switzerland: SARON – Swiss Average Rate Overnight

*Due to some inconsistency adjustments are being developed to help bring about some continuity internationally.

LIBOR & SOFR: Important Dates

  • 12/31/2021: Last date for LIBOR will be published.
  • 01/01/2022: First date to use new index to be used.
  • 06/30/2023: LIBOR is deactivated and ends matured contracts.

LIBOR & SOFR: What You Should Be Aware Of

  • The majority of banks are moving to SOFR. Most have the capability to use both.
  • Monthly billing on your adjustable-rate facilities, i.e. Floor plan, Term notes, swap agreements.
    • Floor plan billing usually comes on the following month so you will see the changes starting with your January bill that would be delivered in February.
  • Be aware of your maturity dates. Expect to see new documents with the new index and or some fallback language. The following example is provided but there will be many versions based on the bank
    • “Consultations proposed that following a trigger event the product would pay interest at a SOFR-based rate, with an adjustment so that the successor rate would be more comparable to LIBOR.”
  • Identify if any facility needs to be amended. Master agreements need to reviewed as well.
  • Understand the spread between the LIBOR and SOFR and the impact to monthly payments, residuals, payouts etc.
  • Seek direct communication with your bankers so that you have clarity as they apply to your specific facilities.

For any questions on this for our team at Rosenfield, please click here to contact us.