What about LIBOR?
Sometime after 2021, LIBOR is expected to be discontinued. The Financial Conduct Authority in the United Kingdom has announced that it will stop requiring banks to report the transactions that are used to calculate LIBOR.
In the US, this change affects an estimated $1.2 trillion dollars in adjustable-rate mortgages. To help facilitate the likely transition away from LIBOR, the Federal Reserve convened a working group called the Alternative Reference Rates Committee that has recommended an alternative index called the Secured Overnight Financing Rate (SOFR) and is promoting its use on a voluntary basis.
What does this mean for Lenders and Borrowers?
First, lenders with loans or lines of credit based on LIBOR need to identify all of their LIBOR loans. A portfolio of loans likely contains a wide variety of terms and language that will need to be assessed. For example:
- Which loans were papered on loan documents that didn’t contemplate that LIBOR may go away someday? Or perhaps they contemplated only a temporary suspension of LIBOR?
- For loans that do have fallback provisions when LIBOR goes away:
How do lenders fix this?
There’s a good possibility that many LIBOR loan documents will have to be modified because the fallback provisions are either nonexistent, unclear or impractical, or because the margin cannot be adjusted and is either too high or too low when added to the new alternate index. For loans needing modification, lenders should begin contacting borrowers well in advance of the potential change in the index.
To prepare for the end of LIBOR , Contact us today at: 866-774-3282