Waiting For Banks To Drop Libor

FLORHAM PARK, NJ–Nowadays when Greg Nalbandian, a senior managing director in HFF’s local office, sees a term sheet in a deal with Libor-based financing it includes language stating that if the market were to transition away from the benchmark rate, a comparable benchmark will be used to price the loan. The language started to appear in term sheets within the last several months and has become a staple in the last few, Nalbandian tells GlobeSt.com.

Its appearance, though, hasn’t caused so much as a ripple though because “everyone know this is going to happen,” Nalbandian says. And indeed the agreed-upon date for transition has been set for year end 2021. Everyone even “knows” what that substitute benchmark is almost sure to be, Nalbandian also says: the Fed’s favored replacement, the secured overnight financing rate, or SOFR, which it began publishing in April.

Regulators Try To Nudge Banks Along

Try telling the global financial ecosystem that. As the Wall Street Journal has just reported, regulators on both sides of the Atlantic are pushing banks to wean themselves faster off of the scandal-plagued Libor. For example, in a recent speech UK Financial Conduct Authority CEO Andrew Bailey said (per Reuters), “The best option is actively to transition to alternative benchmarks. The most effective way to avoid Libor-related risk is not to write Libor-referencing business.” In the US, the Financial Stability Board has just released a statement noting that “In the markets which face the disappearance of IBORs (interbank offered rates), notably markets currently reliant on LIBOR, there needs to be a transition to new reference rates.”

Working The Deal

Any ambiguity in the transition path, however, is not being felt by the people actually working the deals, such as Nalbandian. He tells of a recent transaction he worked on, along with colleagues Roger Edwards, Devlin Murphy and Andrew Zilenziger: $28.75 million in preferred equity and construction financing for the development of the first phase of Twin Lakes Center, a 153,229-square-foot, Wegmans-anchored project within the Research Triangle of Cary, NC. The team secured the $22.5 million, floating-rate construction loan with CapitalSource for the developer, LeylandAlliance. The construction loan, Nalbandian says, was at a very high loan to cost on a non-recourse basis.

This is not to say that borrowers are sanguine about the rising cost of Libor. Nalbandian reports that he has seen an uptick of borrowers requesting shorter-term, fixed-rate type loans to mitigate the continued increase in Libor to control financing costs. And for construction financing, he says, spreads for very strong projects have come in significantly — by 50 to 75 basis points — to offset the increase in Libor.

“I also think that the recourse requirements have come in dramatically too for a lot of projects,” Nalbandian says. “Not that long ago it wasn’t uncommon to have a construction loan that had a full repayment guarantee. Now it’s very possibly to have a repayment guarantee of 15% to 20%.”