How to Prepare for the Libor Transition
The London Interbank Offered Rate (LIBOR) is expected to lose its status as the global interest rate benchmark on January 1, 2022.
How to Prepare
When you are planning for your financing needs, it is important to note that the London Interbank Offered Rate (LIBOR) is expected to lose its status as the global interest rate benchmark on January 1, 2022. LIBOR is a rate of interest that one bank charges another on an unsecured basis and is commonly used for commercial real estate borrowing and lending.
After the change, banks will no longer be able to enter new LIBOR transactions, though some rates and existing contracts will be honored until mid-2023. LIBOR will be replaced by a variety of alternative reference rates (ARRs). In the US, regulators prefer Secured Overnight Financing Rate (SOFR), a metric based on overnight market transactions. There also are alternative rates being offered in the US, such as Ameribor and the Bloomberg Short Term Bank Yield (BSBY).
Below are steps businesses can take to prepare for the LIBOR transition:
- Take inventory of your existing contracts, loans and derivatives to identify LIBOR references and assess their relevant impact and timing.
- Begin discussions with lenders now to avoid additional costs associated with renegotiating contracts later.
- Consult with trusted advisors to better understand the accounting and tax implications of the LIBOR transition, including modifications of existing contracts.
An experienced team of bankers can help you navigate these complex financial changes so you can focus on growing your investments.