May 15, 2019

Current and Future Loans Impacted

It’s official. Libor, the standard index controlling over $350 trillion of financial instruments, is scheduled to be replaced by 2021. That is the target date agreed upon by several international governing bodies that include an arm of the Fed. If you have a bank loan with a fixed rate using a swap or are considering such a loan in the future, your fixed rate could become "unfixed" and take an unexpected jump.

Without some proactive attention, there is the possibility that a bank without a conscience could use this event to improve its profits at a substantial cost to the borrower. We have seen loan documents where some banks state that the Libor replacement would be the Wall Street Prime Rate while others use the 10-year treasuries rate. The most likely Libor replacement is an index known as SOFR (Secured Overnight Financing Rate). It has the closest value to Libor but it is not equivalent.

Using a $15 million loan with a 10-year fixed rate as an example, the most favorable outcome would be an additional cost of $100,000 using SOFR while a replacement using the Wall Street Prime would have an incremental cost of roughly $2 million. Neither is good and one is disastrous.

4 things you can do to protect yourself.

So, what are the things you can do to stop this financial global warming from impacting you?  Here are four basic recommendations:

1. Be AWARE! - If you have a loan with a fixed rate, send it for review to a US Government registered Swap Advisory Company. CMAC Partners is one such company but others may be found at That advisor should be able to examine the replacement provisions both in your loan and your swap and assist you in assessing your risk. If you are considering new financing, look to see if Libor is the basis for a floating rate loan or a loan fixed with an interest rate. Do not let the complexities dissuade you.

2. Negotiate New - Do not move forward with a Libor-based loan until you have negotiated Libor replacement language that creates symmetry between the loan and swap documents and provides you with reasonable assurance of negligible impact. Because this issue is new to many banks, you or your advisor may have to take the lead in providing that language. CMAC's team has been working with banks for more than two years.  A large national bank has now adopted our team’s language in its dealings with its proactive clients.

3. Renegotiate or Refinance Existing - Right now the market is highly competitive. It’s a good time to sit down with your bank and renegotiate loan terms. That includes loan and swap language on Libor replacement.  If you can't reach terms that are suitable to you and your swap advisor, consider refinancing. Remember that you are not tied to that bank by either a negative or positive swap value. You can take those values and move them along with your business. Your certified swap advisor can explain how. In the end, not only may you may end up with a more stable loan but one with lower pricing and greater longevity.

4. Get it in writing - We have heard too often the refrain from bankers "Don't be concerned. This is way too big for our bank to do something that would negatively impact all these borrowers." Good, then get it in writing. The reality is that the bankers speaking directly to the borrowers are not the policy makers.  Even a little tilt in the bank's favor (we can be sure it's not going the other way) can mean substantial loss to the borrowers.