One of Wye River Group’s Principals had the privilege of speaking at the Midwest Business Managers Meeting on April 22.
Chris Wienk provided a presentation (below) on the LIBOR to SOFR Transition, which provided a comprehensive overview of the two benchmark rates and identified their key differences. Regulators are actively encouraging banks to cease using the London Interbank Offered Rate (LIBOR) for new loans and derivatives transactions as soon as possible (and no later than December 31, 2021) and have identified the Secured Overnight Financing Rate (SOFR) as the replacement or “fallback” rate.
Unlike LIBOR, SOFR is derived from actual market transactions and is a more objective and transparent benchmark rate. For schools with existing LIBOR-based lines of credit, loans and/or interest rate swaps, there will be a term adjustment and spread adjustment to equate the existing rate to a new SOFR-based rate. Additional detail regarding each of these adjustments is provided in the presentation available below.
It is recommended that schools review their existing financing and derivative agreements that are based on LIBOR to determine whether appropriate LIBOR fallback provisions exist. If they do not, the agreements may need to be amended.
For existing loan agreements, there has been no universal way in which LIBOR fallback has been outlined to date and the solution may need to be reached on a case-by-case basis through negotiation with the lender and counsel firms involved in the transaction.
For existing derivatives contracts, the International Swaps and Derivatives Association (ISDA) provides a formal mechanism for the bilateral modification of contracts that fail to address LIBOR fallback. Importantly, all derivatives transactions commencing on or after January 25, 2021 will automatically incorporate standard ISDA fallback provisions and will require no additional action.
Please contact us if additional guidance or education on LIBOR to SOFR transition would be helpful. We are always happy to help!