Libor is going away and there is no final decision on what index will be used to replace it. Due to the manipulation of Libor by a few bankers in London, Libor will cease to be the index as it turned out it was never a real number. It was simple what a small group of London bankers decided it would be, and they made it so they could trade on it and generate illegal profits to their own book. It is proposed to now change it to a actual rate based on real transactions as measured by independent sources.
The US is proposing using the Treasury repo rate to be published by the NY Fed daily. This is known as the Broad Treasury Financing Rate -BTFR, and is based on around $660 billion of trades daily. It is a fluid and real market. It is the cost of overnight loans collateralized by US government debt.
The UK is proposing using the Sterling Overnight Index rate which is similar to the rate proposed by the NY Fed. Japan is proposing the overnight call rate which is considered to be the risk free rate in Japan called Tonar.
These are all rates based on real trades in liquid markets that have active trading every day.
The issue is how does the transition take place legally. There are trillions of loans across the world indexed to Libor rates. It is currently not clear how the transition will work since Libor is being eliminated. How do you price a loan based on a rate that no longer exists. What is the legally enforceable rate? How enforceable is the loan agreement if the index rate does not exist or if it is shown to be a manufactured rate that has been replaced by another index.
There are a lot of so far unclear answers to these questions that could present some major legal issues once the rate is replaced. The other issue right now is there is no replacement rate in place yet. So what do now loan docs say is the index rate for new loans knowing that will change during the life of the loan to something unknown today. There are no clear answers to these issues yet and it is inhibiting lenders who are fearful about how to word the docs to be enforceable when the change does get implemented. For borrowers, there is concern as to what is the price of their loan. On large construction or other floating rate loans now priced over Libor, it is very unclear what the real rate will be. A few basis points difference on a large loan that may be outstanding for three years can make a difference.
All of these issues are being worked on and will get resolved, but at the moment there are no final answers.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
