Leaving LIBOR: June 1 Market Update

Tuesday, June 1, 2021
It’s not easy to move an estimated $200 trillion market away from an established reference rate and have it coalesce around another. Progress will undoubtedly be halting and uneven, as lenders try to align themselves with the market. The purpose of this update is to help lenders make educated decisions during that process by highlighting market trends and developments for their consideration. 

1. Term SOFR will be available soon. 

The Alternate Reference Rates Committee (ARRC) announced on May 21st that it had selected CME Group (CME) as the administrator it plans to recommend for a forward-looking Secured Overnight Financing Rate (SOFR) term rate, once market indicators for the term rate are met. The ARRC has identified several market indicators in its May 6th release, consisting essentially of visible progress in the use of SOFR in derivatives and cash products which, according to the ARRC’s announcement, are expected to be met “soon”.

  • We note that CME has been publishing 1, 3 and 6-month term SOFR rates that are aligned with the ARRC’s key principles for a forward-looking SOFR term rate and compliant with the Principles of Financial Benchmarks of the International Organization of Securities Commissions (IOSCO) and the Benchmark Regulations of the EU and the UK (BMR) since April. Its current rates are available here.
2. Credit Sensitive Rates (CSR) are gaining traction. 

Midsized banks have been reluctant to adopt SOFR as the replacement benchmark for LIBOR and are actively considering – and in some cases have announced – their preference for one of the four CSR that have been introduced and are being supported by established industry players.

  • The four CSR are AMERIBOR, administered by the American Financial Exchange, LLC, the Bank Yield Index, administered by ICE Benchmark Administration, the Bloomberg Short-Term Bank Yield Index (BSBY) administered by Bloomberg Index Services Limited and the IHS Markit Credit Rate, administered by IHS Markit.
  • On April 14, 2021, Zions Bancorporation announced its intent to adopt AMERIBOR as a replacement index for LIBOR for the largest portion of its non-syndicated commercial loans currently indexed to LIBOR.
  • The first syndicated credit facility which references a CSR as the LIBOR replacement came to market recently. The $150MM credit facility to Duluth Holdings, which closed on May 14th, was led by Bank of America and used BSBY as the initial reference rate, with a fallback to term and daily simple SOFR in the event that BSBY became unavailable or was no longer representative. A copy of the credit agreement is available here.
  • According to the Loan Syndications and Trading Association (LSTA), a number of recent transactions have included an opt-in trigger that allows transition to replacement rates other than SOFR in advance of the permanent cessation of LIBOR.
  • In recognition of the increased interest in CSR, the LSTA published a slot-in rider that works with the ARRC hardwired fallback language and allows lenders to incorporate a CSR as an option anywhere in the waterfall for the Benchmark Replacement definition.  

We will continue to monitor developments and provide additional details as they become available. In the meantime, please
feel free to contact us if you have any questions.