WHAT IS LIBOR?
The London Interbank Offer Rate or “LIBOR” is a variable interest rate that serves as a benchmark for financial contracts including commercial loans, mortgages, derivatives, and more. Over the past several years the financial industry has been preparing for the expected replacement of LIBOR with an alternative structure for reference rates.
WHY IS LIBOR BEING REPLACED?
Following the financial crisis in 2008-09, market participants expressed concerns over an outdated LIBOR submission framework and the potential for manipulation of LIBOR rate settings. As a result, in 2017 the UK Financial Conduct Authority (FCA) announced that LIBOR would be phased out and replaced with a more transparent process for determining benchmark rates.
HOW DOES LIBOR TRANSITION IMPACT BMT CLIENTS?
LIBOR transition will impact many different types of existing financial contracts, including commercial loans, lines of credit, derivative hedges, and any other financial instruments tied to LIBOR. To prepare for LIBOR transition, some BMT commercial clients will be asked to execute amended loan agreements or other documentation during the first half of 2021.
BMT will contact clients who require additional documentation from the LIBOR transition.
I HAVE NOT RECEIVED ANY AMENDMENT DOCUMENTS. DO I NEED THEM?
Not necessarily. Many of BMT’s existing financial agreements already contain provisions for the replacement of LIBOR as a reference rate. Unless you are a commercial borrower or party to an interest rate swap, it is likely that your financial agreements already contain the required provisions related to LIBOR cessation.
WHEN IS LIBOR EXPECTED TO END?
LIBOR will likely exist in some form for quite some time. However, we expect that LIBOR will be phased out as a reference index at some point over the next several years. Prior to the actual cessation of LIBOR there will be additional notice that describes this process in greater detail.
WHAT SHOULD I EXPECT DURING THE TRANSITION?
If you are a party to a LIBOR-based financial contract that will be transitioning to SOFR you will receive additional information from your BMT relationship manager. Some borrowers may be asked to execute an amendment to their original loan agreement, while other loan agreements may remain unchanged.
HOW DOES LIBOR TRANSITION AFFECT MY SWAP CONTRACT WITH BMT?
Interest rate swap contracts will be affected by LIBOR transition and will require an update to the ISDA Master Agreement and Schedule that governs the transaction. BMT as an institution has opted in to the existing ISDA Protocol governing LIBOR transition and is therefore a party to ISDA’s central fallback protocol. BMT will be asking customer counterparties to enter into an updated ISDA Schedule that addresses LIBOR cessation.
WHEN CAN I EXPECT TO SEE AMENDMENT DOCUMENTS?
BMT’s commercial borrowers have already received the required loan amendments. BMT’s Capital Markets desk will be distributing ISDA Schedule amendments to swap customers beginning in early 2021.
I HAVE MORE QUESTIONS. WHO CAN I CONTACT?
For addition information about LIBOR transition please contact your BMT relationship manager.