The London Interbank Offered Rate (LIBOR) and other interbank offered rates, which are used as reference rates for floating rate loans, derivatives and other financial instruments, are expected to end in late 2021. The LIBOR will likely be replaced by the Secured Overnight Financing Rate (SOFR). The US dollar (USD) LIBOR is commonly used in floating rate commercial mortgage lending agreements as a reference index that is purported to reflect the borrower’s cost of financing, with the borrower paying interest at an interest rate calculated as USD LIBOR plus a margin or “spread”. reflects market conditions and the price of the borrower’s credit risk to the lender. While LIBOR reflects the current market for unsecured large-scale fixed-term loans to banks in a specific currency and on various terms on the London interbank market, SOFR reflects the actual retrospective cost of borrowing overnight through repurchase agreements (“repos”) backed by US Treasuries.
Since the SOFR is measured on the basis of transactions that are secured by government bonds, which have a negligible risk of default, and therefore “is designed to exclude the credit risk of the counterparty and only take into account economic factors”, the SOFR is a so-called ” risk-free interest rate ”. . “ Given the secured nature of the underlying funding (ie repos backed by Treasury securities), the SOFR is expected to be lower than LIBOR. A transition from LIBOR to SOFR would therefore require an adjustment of the spread charged to borrowers in order to maintain comparable overall interest rates and to avoid inadvertent transfers of value between lender and borrower. The suspension of LIBOR will affect this best online payday loans instant approval and derivative contracts and will either trigger provisions for interest rate provisions or, if these provisions are missing or do not adequately take into account the permanent replacement of LIBOR, changes to existing contracts will be necessary. The discontinuation of LIBOR also requires lawyers currently negotiating new loans or existing loan amendments to consider the differences between LIBOR and SOFR in a climate of uncertainty as consensus gradually emerges on the introduction of SOFR (or any other LIBOR alternative ) crystallized out.
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