The phase-out of LIBOR risks having some drama
The LIBOR sunset is an issue that many in the CRE industry would like to ignore, assuming it will be resolved. But as Matthew Blair, Managing Director of Cushman & Wakefield, wrote in a recent article, the end of LIBOR is likely to be messy.
LIBOR, the most frequently used index in the pricing of adjustable rate commercial mortgages, has long been controversial as it has been at the center of multiple rigging scandals. It will be extinguished by the end of this year, and tThe recommended alternative in the United States is the guaranteed overnight rate..t
“It’s a very different benchmark than LIBOR,” Adam Lustig, partner, head of the real estate practice group Bilzin Sumberg, told GlobeSt in an interview last year. “We try to do our best to incorporate language into the documents to avoid unintended or adverse consequences, ie” If LIBOR is not available, the loan is converted to a prime rate index instead of LIBOR. “
Current banking regulations require them to stop writing LIBOR contracts by December of this year, but Blair believes most banks will stop writing those contracts by June to grant a six-month grace period. . After that, banks will have to choose an alternative benchmark rate for taking out loans. But, asks Blair, what will happen to the loans already tied to LIBOR after the end of the year?
Recently adopted LIBOR sunset extension allows “most” legacy contracts maturing before June 2023 to continue to be tied to LIBOR–but as Blair points out, what “most” means is a guess. (His estimate? About $ 2.25 trillion in loans will not mature by June 2023, if you assume a C&I loan market size of $ 2.6 trillion, a syndicated loan market of worth $ 2 trillion and an average loan with a term of five years (with an assumption that some will prepay).
In short, Blair advises against banks assuming that extensions will occur. “Given the huge political shift towards the Democratic Party this past election season, I guess further extensions are less likely,” he wrote. “Thought in conjunction with the ongoing San Francisco litigation seeking an injunction against eight named banks to no longer be permitted to use LIBOR, the odds appear to be diminishing dramatically. ”