![]() Transitioning Remaining Loans to SOFR: Long Road Ahead but Room for Optimism The transition to SOFR was generally smoother than what lenders were expecting, largely in part to AARC’s recommendation of the CME Term SOFR back in July 2021, which helped generate a term structure akin to LIBOR. For the non-regulated direct lending market, however, the share of new originations priced to Term SOFR was closer to 50%. Based on data from Refinitiv, a large majority of syndicated US loans originated in 2022 were priced to Term SOFR. ![]() New bank loan originations in 2022, which post Dec 31, 2021, should not be pegged to LIBOR, went according to expectations. ![]() The state of play: Where do US private debt markets stand?īank loan originations tied to SOFR in 2022: On track This is primarily because SOFR is thought to be less susceptible to manipulation and is based on a vast volume of daily transactions (nearly $1 trillion), as opposed to LIBOR (estimated $500 million). In 2017, the AARC then recommended the SOFR, a measure of the cost of borrowing overnight collateralized by Treasury securities, as the preferred alternative rate. In 2014, the Alternative Reference Rates Committee (AARC) was created by the Federal Reserve Board and the New York Fed to support the transition away from LIBOR. In the wake of the allegations, financial regulators around the world urged financial institutions to move away from LIBOR. Since LIBOR was calculated from self-reported bank submissions, banks could in theory change the submissions and influence the published LIBOR value. The market was awash with allegations that during the financial turmoil, banks were misreporting borrowing rates in order to convey financial stability. As the dust finally began to settle on the financial crisis, public scrutiny in mid-2012 turned sharply to focus on LIBOR, which had been the standard reference rate for most adjustable-rate products for decades. The impetus for change: LIBOR and the financial crisis Now, as the deadline looms, it’s essential that we examine the two fundamental questions: what’s the current status of LIBOR transition in the U.S private debt space, and how well prepared are institutions for an orderly transition to the aforementioned new rates? Careful transitioning is the key to minimizing large-scale financial impacts, especially in the private debt market. LIBOR is the basis on trillions of dollars of loans and is tied to a multitude of products, such as adjustable-rate mortgages, student loans and corporate loans. The need to successfully shift to an alternative rate such as the Secured Overnight Financing Rate (SOFR) is vital. Indeed, borrowers and lenders are acutely aware that in just months the long-utilized rate will cease to exist. Time, as they say, moves on relentlessly, and for financial institutions the clock is well and truly ticking down on the transition away from the LIBOR.
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