What is LIBOR?
LIBOR stands for the London Interbank Offered Rate and is an interest rate for borrowing between banks. This rate is used in contracts involving hundreds of trillions of dollars, including everything from corporate loans to interest rate derivatives to adjustable rate consumer mortgage loans.
When will LIBOR be discontinued?
LIBOR is scheduled to end December 31, 2021, but it could cease being a usable rate sooner or later depending on how alternative rates develop.
Why is LIBOR being replaced?
LIBOR is being replaced because it no longer represents a real, functioning loan market, and because there were multiple allegations of illegal manipulation during the last crisis. As a result, regulators want to eliminate LIBOR in favor of a new, more robust reference rate that more accurately reflects the lending environment.
What does it mean for you?
The discontinuance of LIBOR may affect the products you use to manage your business. With its expiration approaching, we recommend consulting your financial and/or legal advisors to discuss possible effects.
As you perform this review, it may be a good time to make some routine interest rate considerations. Is there a mortgage you can refinance or a business loan that can benefit from a cap, swap or collar? These products enable you to lock in rates for the next several years and are particularly low in cost in comparison to the last 10 years.
What will replace LIBOR?
The most likely replacement for U.S. dollar instruments is the Secured Overnight Financing Rate (SOFR). SOFR is the interest rate for overnight loans secured by U.S. treasuries and is quoted by the Federal Reserve Bank of New York. SOFR is considered preferable to LIBOR mainly because it is based on actual transactions in one of the deepest lending markets in the world.
What will happen to products that reference LIBOR when it ceases to exist?
All LIBOR contracts will need to be adjusted to account for a replacement rate. Some agreements from the past year or two have “fallback” provisions that detail those adjustments. Others may be completely silent on the point. We are not able to say precisely how these modifications will affect any particular agreement; however, it is likely that a rate adjustment to improve the comparability of pricing outcomes before and after LIBOR will be needed. The industry is still considering many questions on how to determine the appropriate adjustment.
How can you stay informed?
The Alternative Reference Rate Committee (ARRC) is a group of private-market participants convened by the Federal Reserve Board and the NY Fed to help ensure a successful transition from LIBOR. For more information, visit the ARRC page on the Federal Reserve Bank of New YorkOpens in a new window.. Also, make sure to maintain an open dialogue with your banker.
