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News & Events / Blog / Keep the SOFR Momentum Going!

Keep the SOFR Momentum Going!

Despite setbacks, most notably from the COVID-19 pandemic, most regulators and investors expect the process to replace LIBOR with SOFR to remain on track. The Alternative Reference Rates Committee (ARRC), consisting of major banks, insurers, and asset managers alongside the New York Fed, have been rallying derivatives investors and users of LIBOR to be ready for the end. Banks are spending millions of dollars and mobilizing everyone from lawyers to trading-floor staff to get ready.

Yet, some wonder whether the deadline for the transition away from LIBOR will be pushed back. Investment-bank analysts and salespeople estimate that only a quarter of clients are ready for the benchmark to disappear, despite the fact that all the concerns that led to the decision to retire LIBOR were present again in March’s market stress period, underscoring the need to make the transition in a timely manner.

So, despite naysayers and those crying “delay,” all indications are that we are in the “final countdown” of the SOFR transition period and the end of LIBOR on December 30, 2021. With that deadline approaching, we’ve put together a few of the most pressing recommendations from the Loan Syndications and Trading Association (LSTA) and ARRC that the industry should be implementing now to be ready.

1. Make sure your systems are ready.

Your systems are the foundation of loan management. It is extremely important to make sure your homegrown or third-party systems are ready to support all of the proposed SOFR methods (Compounded in Advance, Forward-Term SOFR, Simple Daily SOFR in Arrears, and Compounding in Arrears).

The ARRC Business Loan Working Group (BLWG) has worked with vendors and financial institutions to develop conventions and calculations to help update loan systems. At this point on the timeline, vendors and/or internal technology departments should be working on implementing code in support of the transition to SOFR. AFS clients can already support 3 of the 4 methods, with Compounding in Arrears set for delivery on September 30, 2020 (and, in fact, has been delivered for AFS Level III™ already).

Updating systems now with plenty of time for testing and allowing users to become accustomed to the new processes will assist in meeting the recommendation.

2. Stop offering LIBOR loans.

It may seem like a long time away, but planning a cutoff date for newly originated LIBOR loans is critical for any loans set to mature after 2021.

3. Be transparent with clients.

All new business loans should include ARRC-recommended (or substantially similar) USD LIBOR fallback language as soon as possible. Anticipating that markets may be unsettled when LIBOR ends, we can further anticipate that executing a large number of amendment fallbacks would be challenging (to say the least). Additionally, adding the fallback language to contracts now provides a measure of transparency and assurance of how you will be moving forward with their loans after the transition, which is vital to attracting and keeping desirable clients.

Taking that transparency further, for any institutions or loans where the lender/borrower will have discretion in choosing a rate other than SOFR to provide LIBOR, it’s important to be ready to disclose which rate(s) will be used and any related spread adjustment methodology at least six months prior to the effective date.

4. Find the resources to help you reach the end game.

With the anticipated end of LIBOR only around 500 days away, banks and other lending institutions need to realize there is still a lot to accomplish in the interim. To help address these recommendations and additional requirements, the ARRC, LSTA, and AFS have already published and are working on additional resources to assist in navigating SOFR loans. The ARRC website contains a wealth of materials, including the SOFR Starter Kit that details SOFR best practices, conventions for everything from student loans to syndicated deals, and examples of recommended Fallback Contract Language. LSTA is currently drafting SOFR “Concept Credit Agreements” to facilitate the origination of SOFR loans. And AFS has been in constant contact with clients, offering update webinars, answers to frequently asked questions, and client-specific documentation and training to facilitate implementing SOFR.

There are a myriad of resources available to help in these end stages of transition. If you have any questions or would like to hear how AFS can help your organization be ready for the LIBOR Transition, please contact Dean Snyder at dsnyder@afsvision.com.
 

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