LIBOR’s Phase-Out Likely To Have Some Drama
Most banks will likely stop writing those contracts by June to allow a six-month grace period.
The sunsetting of LIBOR is an issue many in the CRE industry would like to ignore, assuming that it will be worked out. But as Cushman & Wakefield Managing Director Matthew Blair writes in a recent post, LIBOR’s end is likely to be messy.
LIBOR, the index most frequently used in pricing floating-rate commercial mortgages, has long been controversial, as it’s been at the center of multiple rigging scandals. It’s sunsetting by the end of this year, and the recommended alternative in the US is the Secured Overnight Financing Rate.t
“It’s a very different benchmark than LIBOR is,” Adam Lustig, Partner, Real Estate Practice Group Leader, Bilzin Sumberg, told GlobeSt in an interview last year. “We try to do the best we can to get some language built into the documents to avoid unexpected or bad consequences, which is saying like ‘If LIBOR’s not available, then the loan converts to a prime rate at the index instead of LIBOR.”
Current bank regulations require they stop writing LIBOR contracts by December of this year but Blair believes most banks will stop writing those contracts by June to allow a six-month grace period. After that, banks will have to choose an alternative reference rate to write loans. But, Blair asks, what will happen to loans already tied to LIBOR after the year ends?
A recently-passed extension to LIBOR’s sunset allows “most” of the legacy contracts maturing before June 2023 to continue to be tied to LIBOR—but as Blair points out, what “most” means is anyone’s guess. (His estimate? Around $2.25 trillion in loans won’t mature by June 2023, if you assume a C&I lending market that’s $2.6 trillion in size, a Syndicated Loan Market worth $2 trillion, and an average loan of five years in duration (with an assumption that some will prepay).
In short, Blair counsels banks against assuming extensions will happen. “Given the tremendous political shift toward the Democratic Party this recent election season I would assume that further extensions are less likely,” he writes. “Weighed in-tandem with the pending litigation San Francisco that is requesting an injunction of eight named banks to no longer be allowed to use LIBOR, the odds seem to decrease dramatically.”