Progress in the transition away from a now-defunct reference rate is “encouraging,” but “timely action” is still needed by banks before use of the rate is cut off completely by next summer, a Federal Reserve-sponsored group said Thursday.
In releasing the results of a loan remediation survey it conducted this summer, the Alternative Reference Rates Committee (ARRC) said it found that most of the 70 survey respondents indicated they had documented remediation plans in place and highlighted plans to actively transition their London Interbank Offered Rate (LIBOR) loans to those using the alternative Secured Overnight Financing Rate (SOFR) ahead of cessation of LIBOR on June 30, 2023.
LIBOR, a reference rate widely used by banks and other financial institutions for setting interest rates on loans for such things as new cars, mortgages and student loans, officially ended for new loans as of Jan. 1, 2022. Loans still in place as of then and using the rate must cease using LIBOR as of June 30 of next year and transition to a new rate – such as the SOFR, which was developed by the ARRC. The ARRC was sponsored by the Federal Reserve Board and the Federal Reserve Bank of New York.
According to the survey results, the ARRC said that “while the majority of business loan borrowers indicated they have been contacted by their lenders about transitioning some or all of their LIBOR loans, the majority of syndicated lenders indicated either that they had not been contacted by an agent or had received no or at most only a few amendments; only 30% of syndicated lenders indicated that they had received a significant number of amendments from an agent.”
The ARRC added that timing-wise, more than half of lender respondents expected that the majority of their LIBOR loans would only have transitioned away from LIBOR by the end of Q2 2023 or later.
“Results from the survey reflect encouraging awareness of the need to be ready for the LIBOR transition, but with just nine months left until LIBOR ends it also highlights the need to ensure that plans for active loan conversion quickly become a reality,” said Tom Wipf, ARRC Chair and Vice Chair at Morgan Stanley, in a statement from the committee. “We have seen the pace of loan refinancing slow in recent months, which reemphasizes the need for lenders to actively reach out to their borrowers to transition now, and not to wait until the next refinancing or the last moment and risk having more loans referencing LIBOR as of June 30, 2023 than expected.”