Why the Elimination of LIBOR Matters for Your Finances

You may have heard that the Financial Conduct Authority is phasing out the London Interbank Offered Rate (LIBOR). The latest schedule notes that the publication of the one-week and two-month US dollar LIBOR will cease as of December 31, 2021. The publication of all other US dollar LIBOR settings will cease after June 30, 2023.

Often tied to loan rates, LIBOR affects more than $350 trillion worth of financial instruments worldwide. To better prepare our borrowers for LIBOR’s elimination, we asked Jonathan Nelson, SVP and Treasurer of Rockland Trust, to weigh in.

What is LIBOR?

LIBOR is the most widely used reference rate in the financial industry. It is calculated from estimates submitted by the leading banks in London and is the benchmark of financial contracts including derivatives, bonds, and loans. LIBOR is published for five currencies (USD, GBP, EUR, CHF, JPY) and seven maturities (overnight, one week, one month, two months, three months, six months, and 12 months).

Currently, LIBOR impacts student loans, mortgages, commercial loans and complex derivatives. As an index for financial products, it was originally intended to be a liquidly traded asset, allowing the LIBOR market‘s many buyers and sellers to transact efficiently. Unfortunately, in 2012 it was discovered that many major financial institutions colluded on a regular basis to set the daily LIBOR rates, rendering them highly unstable. As a result, regulatory agencies, financial markets, and lending institutions are moving away from LIBOR and establishing more reliable alternatives in preparation for its eventual retirement.

How do I know if my loan is tied to LIBOR?

LIBOR is used as an index on adjustable and variable rate loans, so your loan could be tied to LIBOR if its rate is not fixed for the entire loan term. Loan notes and agreements spell out to which index your loan is tied.

 

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What should I do for my LIBOR-based loans?

If you have loans tied to LIBOR, Jonathan’s best piece of advice is to contact your loan provider to evaluate any potential risk and identify alternatives. If your loans are based on LIBOR, review options to reduce this exposure.

“With major industry developments such as this, it’s best to discuss options with your loan officer and determine the best course of action. Most financial institutions are selecting LIBOR replacement indices that they can convert your loan to, therefore ensuring that LIBOR’s sunsetting will only minimally impact your finances,” Jonathan said. “As of October 31, 2021, we at Rockland Trust will no longer be offering LIBOR-based term sheets.”

 

Schedule an Appointment To Discuss Your Loans

 

There are a few different variables a borrower can consider when planning for a LIBOR loan transition. First, check the date that the loan matures.  Borrowers with loans that have a variable interest rate, mature after December 31, 2021 and contain an index tied to LIBOR should contact their loan officer to discuss their options.

It is also wise to determine if there is replacement language already in place.  If there is exposure to an adjustable rate loan, there may be a section in the loan documents that outlines what the replacement rate will be in the absence of LIBOR.

If the replacement language is not adequate, it would be prudent to discuss options with your loan officer. This may mean refinancing the loan and tying the new rate to a different index.

PRO TIP: When reviewing replacement loan options, check term sheets, which indicate to which index the rates are tied. Discuss alternate options with your loan officer if the rate is tied to LIBOR and will mature after December 31, 2021.

 

What other indexes are there besides LIBOR?

There are a few indexes that can be used in place of LIBOR, such as:

“On October 31, 2021 we are migrating non-swapped loan term sheets to Prime and CME TERM SOFR and all swapped loan term sheets to CME TERM SOFR,” Jonathan said. “CME TERM SOFR is expected to be the industry choice to replace LIBOR as it is supported by the regulatory bodies, ARRC and most financial institutions.”

 

What are my next steps?

Have questions? Visit one of our commercial lending centers or bank branches to discuss available alternatives and how they tie into your financial objectives. For advice on rates or other financial topics, check out the Rockland Trust Learning Center.