With the issues surrounding the LIBOR-to-SOFR transition constantly evolving, investors may have more questions than answers. CBRE Debt & Structured Finance has teamed up with Chatham Financial to provide investors guidance and direction. Our LIBOR Transition Series features time-sensitive material and other noteworthy items to consider that can be found below. Additionally, you can visit our FAQ page for further information on the subject.

Update on LIBOR Transition


November 2021

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New Loan Originations

Regulators have “encouraged” banks to transition all new loan originations away from LIBOR by January 1, 2022. We have already seen many of these bank lenders begin to originate non-LIBOR indexed debt. Most lenders are using variations of SOFR as the index, but we have seen a small handful of banks prefer the Bloomberg Short-Term Bank Yield (BSBY) or Ameribor index. Regulators have openly questioned the appropriateness of these indices, largely due to concerns over the low liquidity of the transactions that underline these indices and the potential of even less transaction volume during times of turmoil. However, they have yet to outright forbid lenders from using these credit-sensitive rates.

Debt funds and other lenders are, for the most part, still originating debt tied to LIBOR. There are some exceptions, who have either originated SOFR debt or are beginning to offer SOFR term sheets. For many of these entities, the impetus to originate non-LIBOR debt will be when their sources of leverage transition away from LIBOR, and most non-bank lenders have not received definitive timelines on when this will occur from banks.

Most loans originated to date have used compounded in advance, the convention the Agencies began using in Q4 2020. We have started to see some loans referencing Term SOFR, which was only recently endorsed by the ARRC in July, but this could be the direction the market is heading.

Legacy Loans

We have yet to see lenders programmatically transition their legacy LIBOR loans to an alternate index. Those loans that have a definitive trigger tied in some manner to a permanent cessation of LIBOR being published or representative will transition on June 30, 2023. However, many loans allow for lender to have some discretion, and we would anticipate that many of non-bank lenders’ loans may transition sooner, such as when their leverage source transitions, which could be as soon as January 1, 2021.

Derivatives

Liquidity in interest rate caps and swaps indexed to SOFR has dramatically increased. This can be attributed to the increased loan originations indexed to SOFR that require caps and the SOFR First initiative, which on July 26 of this year changed the de facto index in the interdealer swap market from LIBOR to SOFR. Whereas a year ago SOFR indexed caps were trading at a premium to the comparable LIBOR indexed caps; today they are trading essentially at the same prices.

It is worth noting that many banks are currently not willing to offer interest rate caps indexed to Term SOFR, but we are starting to see banks willing to offer these products and expect more to have this capability soon. It is unclear how efficiently these interest rate caps will trade in comparison to interest rate caps using a compounded or averaging methodology.

Banks have also been advised by regulators not to originate new derivatives indexed to LIBOR as of January 1, 2022, with limited exceptions. It seems that banks will be willing and able to offer LIBOR indexed interest rate caps that are associated with loans originated prior to 2022. It remains to be seen what pricing will look like for these interest rate caps, especially as liquidity continues to decrease over time for LIBOR products. Banks, at least as of the time of this publication, are indicating that they will not be able to offer interest rate caps indexed to LIBOR for new originations. This will have implications for non-bank lenders originating LIBOR debt with cap requirements next year.

As always, please feel free to contact your CBRE or Chatham contact with questions or for more information.