Background of LIBOR
The London Interbank Offered Rate (LIBOR) is a set of benchmark interest rates that provide an indication of the average rates at which panel banks could borrow wholesale, unsecured funds for set periods in particular currencies. It is calculated and published daily by the Intercontinental Exchange (ICE) Benchmark Administrator (IBA) based on submissions from a panel of banks. The underlying market that LIBOR is derived from is no longer used in any significant volume. Therefore, the submissions made by banks to sustain the LIBOR rate are often based (at least in part) on expert judgement rather than actual transactions. The UK’s Financial Conduct Authority (FCA) has concluded that the way in which LIBOR is calculated in practice means that it no longer complies with internationally accepted principles for robust interest rate benchmarks. As such, in 2017, the FCA announced its intention to stop compelling banks to submit the rates required to calculate LIBOR after the end of 2021. Therefore, the future of LIBOR is not guaranteed beyond the end of 2021.
LIBOR Phase Out
Farm Credit East, along with other Farm Credit institutions, are actively monitoring and participating in discussions with industry groups and financial regulators about the transition of LIBOR. As you may know, the alternate reference rate that has been proposed is known as the Secured Overnight Financing Rate (SOFR). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and is completely transaction based. You should consult with your own legal, financial and tax advisors with respect to potential impacts of this LIBOR transition.
What you should do
If you have a Farm Credit East loan that is priced to LIBOR, we will be contacting you in the near future to outline our intended approach in transitioning your LIBOR account to a replacement index. Alternatively, if you would like us to take immediate action to transition your rate, please contact your loan officer/relationship manager to discuss available options.