The transition away from a widely used reference rate slated to cease operations at the end of next month is “progressing smoothly,” according to details of a report released Tuesday, but there remains some concern about syndicated loans affected by the transition.
According to a read out of a May 25 meeting of the Alternative Reference Rate Committee (ARRC), a Federal Reserve-sponsored group, momentum continues toward adoption of the alternative it created to the London Interbank Offered Rate (LIBOR), which ceases operations on June 30. The ARRC alternative is known as the Secured Overnight Financing Rate (SOFR).
LIBOR is ceasing operations as a reference rate – for products including new and used car loans and student borrowing — because it may no longer be relied upon to reflect current market conditions. SOFR was developed as a market condition-reflective vehicle to be a long-term replacement for LIBOR, which itself has been around since 1986. LIBOR was created by the British Bankers Association as a standardized benchmark for pricing floating-rate corporate loans. Over time, the reference rate was applied to a wide variety of other products.
However, as some products have been using LIBOR for up to 37 years, the rate has proved to be somewhat sticky in certain circumstances. According to the ARRC readout, some participants in the May 25 meeting “noted the need for efforts to remediate syndicated loans to accelerate.”
The readout recommends that, in advance of June 30 (just four weeks away), that investors continue to “remediate LIBOR loans and ensure that borrowers and lenders are actively and cooperatively involved in doing so.”