Since last fall, two major developments have been impacting the shift away from the London Interbank Offered Rate (LIBOR) as the reference rate banks use to price variable-rate commercial loans:
- Bank regulators extended the final publication date for all but the 1-week and 2-month U.S. dollar LIBOR settings to June 30, 2023. Previously all U.S. dollar LIBOR rates were set to expire at the end of 2021.
- Banks started pivoting away from the early candidate to be the preferred replacement rate — the Secured Overnight Financing Rate (SOFR) — in favor of a handful of emerging credit-sensitive alternative rate indices. A horse race has ensued to see which of these new alternatives will win out.
Here's an update on these developments and how they impact corporate borrowers.
Impact of the LIBOR Extension on Existing Loans
Extending the life of LIBOR won’t impact borrowers with existing loans that mature before June 30, 2023. They don’t have to do anything. A number of LIBOR settings will continue to be published through that date and LIBOR-based loans will continue to reprice based on the longtime rate index.
Borrowers with LIBOR-based loans maturing after mid-2023, on the other hand, should expect their lender to approach them prior to that time to transition their contract to an alternative rate index.
Bottom line: Extending the publication dates for most LIBOR terms allows for a much larger number of legacy loan and derivative contracts to mature and avoid the need to transition to a new rate index. As a result, borrowers will spend less time and money reading, reviewing and modifying these contracts, and see the absolute level of litigation risk around legacy contracts reduced.
How Will the Extension Affect New Loans?
Here’s where little has changed. Although the publication date of certain LIBOR terms has been extended to June 30, 2023, regulators announced that new contracts entered into after 2021 should use a non-LIBOR alternative rate index. They view the use of LIBOR in any new contracts as posing a safety and soundness risk for banks.
As a result, banks are preparing to write new contracts using non-LIBOR indices by the end of 2021 at the latest. At Hancock Whitney, for instance, we plan to use non-LIBOR indices in the contracts we originate in the second half of 2021.
The Pivot Away from SOFR
A question still to be answered: Which of the competing alternative rate indices will rise to the top? Last fall, when I wrote here about this topic, the clear front-runner among alternative non-LIBOR indices was SOFR. But since then, banks have started leaning heavily in the direction of some newly developed, forward-looking term indices, all calculated in a similar fashion, including AMERIBOR, the Bloomberg Short Term Bank Yield Index (BSBY) and the ICE Bank Yield Index.
Hancock Whitney will use AMERIBOR Term-30 as its preferred replacement rate index for 1-month LIBOR. Offered by the American Financial Exchange and calculated and published daily by the Chicago Board Options Exchange, AMERIBOR Term-30 is highly correlated to 1-month LIBOR. We view it as a “plug-and-play” replacement.
As for the derivatives market, we are seeing some development in the SOFR swap space and the BSBY swap space, but it is early. In addition, the Federal Reserve Bank has indicated some reluctance around permitting the development of a derivatives market that uses Term SOFR rates as opposed to the overnight SOFR rate.
Fair and Equitable
Hancock Whitney remains committed to being fair and equitable as we go through this migration away from LIBOR with our clients. If you have any questions about the transition and how it may impact your loans or derivative transactions, please contact your relationship manager.