SOFR being a different rate than LIBOR, with a number of distinguishing features, a “Spread Adjustment” is necessary to minimize the difference of value between the two rates.
The New York Fed, as the administrator of SOFR and in cooperation with the Treasury Department’s Office of Financial Research, publishes the 30-, 90-, and 180-day SOFR Averages as well as an overnight SOFR index.
The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and is based on actual transactions in the U.S. Treasury repurchase market, one of the largest markets in the world. SOFR is the alternative index recommended by the ARRC and the U.S. Federal Reserve to replace LIBOR.
Fallback language in a legal document provides direction on the selection of the replacement index if certain events occur with respect to the currently utilized index. The fallback language can vary greatly from lender to lender, and many older legacy documents do not address a replacement index at all.
Maybe. Depending on the fallback language in the documents, current market conditions at the time of transition, and the lender’s methodology, the fallback index may be higher or lower than the comparable LIBOR Index. Additionally, the spread adjustment applied to SOFR may differ from lender to lender and from your loan and your hedge.
The Alternative Reference Rates Committee (ARRC) is a group of private-market participants convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from U.S. dollar (USD) LIBOR to a more robust reference rate. The ARRC’s recommended alternative is the Secured Overnight Financing Rate (SOFR). It is important to note that the ARRC makes recommendations that will […]
Yes. The fallback language in the borrower’s loan documents will likely not match to the corresponding fallback language in the hedge, leaving the borrower exposed to a mismatch in indices, or “basis risk.” In order to avoid this basis risk, the borrower will have to revisit the loan and swap documents to amend the fallback […]
Yes. Borrowers should be taking an inventory of their LIBOR exposure and developing a plan to mitigate contracts. While the ISDA IBOR Fallback Protocol is designed to provide a fallback should LIBOR cease to exist, borrowers should not rely on the protocol to amend their hedging agreements. Borrowers should be having conversations today with their advisors, lenders, and other stakeholders to […]
Many lenders will discontinue offering LIBOR based products at the end of Q4 2020. It is currently anticipated that LIBOR will no longer be useable as an index beyond 2021.
Most existing or “legacy” loan documents do not contain workable fallback provisions should LIBOR no longer be available. Depending on the fallback language in your loan documents, if the loan documents contain any, the cessation of LIBOR could create significant P&L losses or lead to expensive litigation. For hedging clients, their ISDA documents may be amended either through a bilateral negotiation or through […]
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