LIBOR Transitioning to SOFR
While there are obvious advantages to moving to a truly market-based RFR, there are significant challenges transitioning from an unsecured forward term rate (LIBOR) to a secured overnight rate (SOFR):
- Due to the lack of a large, developed derivatives market, forward term SOFR is not currently available and may not be an option at the time LIBOR is discontinued.
- Without a forward term rate, borrowers and lenders will not know a given interest payment until the end of each interest period.
- What ‘spread’ will be added to SOFR to account for the credit risk premium associated with LIBOR (bank-to-bank lending) and how will that spread be determined.
- Banks have reported significant changes will be required to their operations systems as well as loan documentation to accommodate SOFR in arrears.
You can browse Pensford’s SOFR news and resources to learn more. If you have any questions, please contact us at PensfordTeam@pensford.com, or call us with your LIBOR transition questions (704) 887-9880.