Banking Rules Affecting Interest Rates Are Changing
Here’s What You Need to Know
The Secured Overnight Financing Rate (SOFR) is replacing the London InterBank Offered Rate (LIBOR) in the U.S.
What Is the SOFR?
SOFR is a benchmark that financial institutions use to price loans for businesses and consumers. The overnight financing part of its name references how SOFR sets rates for lenders. It’s based on the rates that large financial institutions pay each other for overnight loans. By taking into account actual lending transactions, SOFR will be more reliable than LIBOR.
What Does This Mean for You?
- You should take stock of your LIBOR exposure under existing loans, notes and derivatives, focusing on transactions maturing after 2021
- The definition of LIBOR should be reviewed, as well as provisions for amending the terms and conditions of the regarding modification
- Review standard documents likely to be used for future transactions
- Assess credit and hedging documents carefully to avoid potentially costly gaps
Be on the lookout for your banker to start talking to you about the transition from LIBOR to SOFR. Borrowers need to take stock of their company’s exposure and determine the right path forward. For more information on SOFR, click here.
As part of our consulting practice, we help clients analyze, negotiate, and restructure financing terms. Contact Steve Hughes for help with evaluating your current lending facility.
Steve Hughes, Director
