What Commercial Borrowers Need to Know About LIBOR Sunset, SOFR, BSBY and AMERIBOR

by Brion J. Kirsch

It probably goes without saying, but not all lending indexes are created equally.  Each may look at different risks or markets, and not all indexes are “plug and play” for commercial lending transactions.  As most have heard by now, LIBOR is set to sunset in phases.   The first phase being the discontinuance of the 1-week and 2-month LIBOR rates as of December 31, 2021.  The second phase discontinues the 1-month, 3-month, 6-month and 12-month LIBOR rates as of June 30, 2023.

Banks and governmental entities have been feverishly researching various indexes and drafting sample transition language, and as of the end of 2020, it appeared that in the United States the endorsed and most widely used replacement for LIBOR would be the Secured Overnight Financing Rate (SOFR).  In recent months, however, many banks and borrowers have begun questioning whether SOFR is the best replacement and have begun looking at other indexes, specifically the Bloomberg Short-Term Bank Yield Index (BSBY) and the American Interbank Offered Rate (AMERIBOR). 

These indexes and possible replacements for LIBOR are not the same and are not equal.  With only four months remaining until the first transition, listed below are answers to some frequently asked questions to help you understand LIBOR replacements and steps you need to take now.

Question:  What are the key criticisms of SOFR?

Answer: SOFR was the early front runner and became the first widely endorsed replacement by large banks, governmental entities, and private market committees empaneled by the Federal Reserve, such as the Alternative Reference Rate Committee.  There are, however, a few criticisms of SOFR.  First, LIBOR incorporated bank risk; SOFR never will (that is really the point of the secured overnight financing rate – it is a risk-free rate).  Second, SOFR is a backward-looking index that is based on the cost of transactions in the market for overnight repurchase agreements.  While many banks and regulators preferred this as a LIBOR replacement, many began to question whether a backward-looking index was actually comparable to LIBOR – which is a forward-looking index.  The response to those concerns was the creation of “Term SOFR,” a series of forward-looking SOFR benchmarks issued by derivatives-exchange operator CME Group Inc.

Question: Why are BSBY and AMERIBOR attractive options?

Answer: Despite the creation of Term SOFR (which may have other issues including potential mismatches with interest rate swap products and calculations), some smaller national banks as well as community banks kept looking for a more suitable replacement to LIBOR and have largely settled on BSBY and AMERIBOR.  Both BSBY and AMERIBOR are unsecured rates (unlike SOFR which is a secured rate) which by definition carry higher levels of risk and therefore tend to generally provide for a higher rate of return.  Plainly stated, both BSBY and AMERIBOR will generally be higher indexes than SOFR, however, the increase in the index can be offset by the margin or interest rate spread – which is entirely negotiable.  Both BSBY and AMERIBOR are forward-looking rates similar to LIBOR, and both incorporate bank risk but may be subject to greater volatility and may take into consideration a wider range of products to generate the rate.  For instance, BSBY takes into account certificates of deposit and wider deposits so that a critical mass is achieved and may not have the term options of LIBOR or SOFR.  By comparison, AMERIBOR currently has a 30-day forward-looking rate, but nothing beyond that.

Question:  Are other indexes under consideration?

Answer: There are several other alternative indexes being considered by governments, governmental entities, central banks, national banks and community banks.  While many lenders and borrowers will “shop” their index by either the lowest monthly payment or the best rate of return, more focus should be paid on the long-term trends and costs associated with a particular replacement index (as well as other factors, such as whether there are any mismatches with the selected index when it is swapped). 

Question:  What steps should commercial borrowers take now?

Answer:  With some of the LIBOR indexes scheduled to cease at the end of 2021, and others remaining on the horizon scheduled to cease as of June 30, 2023, borrowers need to take inventory of their commercial borrowings and determine which, if any, of those borrowings have interest rates that are based in whole or in part on LIBOR.  If so, and if the borrower has not started a conversation with its lender (or vice versa) about what will replace the LIBOR based borrowings, now is the time to have those conversations and determine what is the best path forward for both the lender and the borrower.  During those conversations, it should be clearly communicated and documented what the alternatives are, what the cost of the alternatives will be to each party and what changes need to be made to the existing loan documents to implement those changes. 

Question: What are some areas that borrowers should pay particular attention? 

Answer:  If any of the borrowings are subject to an interest rate swap, cap, collar or other derivative product, the conversations above need to include what replacement index will go into effect under the derivative product and how that index will compare with the replacement index being offered under the promissory note.  Be very careful in this analysis as mismatches of indexes can have very costly results.  Additionally, if the commercial borrowing has a LIBOR floor (language in the promissory note stating that LIBOR will never fall below a certain pre-determined threshold), borrowers need to take extra caution to make sure that any spread adjustment, when factored into the new index (which may or may not have a floor of its own) results in the same or substantially the same monthly payment as it did with the LIBOR rate.

The conclusion is that the more options offered to a borrower the better, but you need to be careful and deliberate in your consideration and ultimate selection of a replacement rate as the cost today may not be the cost tomorrow.  The attorneys at Pullman & Comley, LLC have extensive experience representing lenders and borrowers and are prepared to assist them with a smooth transition from LIBOR that avoids the potential pitfalls. If you have any questions concerning this article or any related matter, please feel free to contact Brion J. Kirsch at or any other member of Pullman's Commercial Finance practice.

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