The end of the London Interbank Offered Rate (LIBOR) is approaching quickly. LIBOR is to be phased out by the end of 2021 and will be replaced by another benchmark rate. LIBOR is an interest rate calculation used globally. Floating Rate Notes use the LIBOR as a reference for calculating the coupon rate. LIBOR reflects the overall health of the financial system and is calculated using a cross-section of the average interest rate of a bank borrowing from another bank.
LIBOR is the reference rate for $300 trillion in global loans. A problem arises with loans using LIBOR as a reference rate. Contracts that do not have fallback language if the LIBOR is not available will be problematic and may convert to a fixed rate contract. Many business loans, floating rate notes and bonds, securitizations, consumer loans including residential mortgage loans, and derivative contracts that will mature after 2021 may be affected.
Consumers should be proactive and check with their lenders. Companies are advised to evaluate their contracts as soon as possible, checking for fallback clauses for when LIBOR ceases to exist. It often takes longer than expected when difficult issues and decisions are involved.
If you have questions about how this will impact you, contact one of our professionals today.
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