LIBOR has long acted as the primary benchmark for interest rates around the world. Come 2022, however, this will no longer be the case. As the financial world transitions over to SOFR many market participants are left wondering how they’ll be affected and what they can do to prepare.
What is LIBOR?
For the last 50 years, the London Inter-Bank Offered Rate (LIBOR) has been used by banks as a guiding standard for calculating interest, the metric being used to set rates for loans across the industry. In the last decade, however, evidence of fraud and collusion has cast doubt on LIBOR’s reliability, damaging its transaction volume.
Industry experts have been seeking a more transparent alternative rate with the Secured Overnight Financing Rate (SOFR) chosen as the recommended U.S. replacement.
How much time do I have?
The LIBOR transition officially began on December 31st, 2021, with 1-week and 2-month LIBOR rates ceasing publication. The remaining rates will be discontinued by June 30th, 2023. At that time, all loans and contracts that used LIBOR will need to be converted to the new standard.
What can I do?
Financial institutions, government agencies, and other entities in the U.S. are transitioning to SOFR, a secured, transaction-based index resistant to market manipulation. While this is good news for regulators and central bankers, those that rely on LIBOR for their contracts and loans will need to act quickly.
- Borrowers review their portfolio for any loans whose interest rates are based on LIBOR. Any contracts or transactions that reference LIBOR will need to be amended.
- Brokers can be a good resource for identifying what changes need to be made, as well as the cost for doing so.
- Loans with LIBOR floors should be identified and adjusted to ensure the same monthly payment post-transition.
- Take stock of your portfolio
- Reach out to experts to evaluate your options
- Keep up to date on the state of the market
- In the immortal words of Douglas Adams, “Don’t Panic”!