How the Syndicated Loan Market is Dealing with the Potential Replacement of LIBOR

By: Stephen A. Rutenberg and Fiammetta S. Piazza

The May 2008 disclosure of the manipulation of London Inter-Bank Offered Rate (LIBOR), in what has become known as the ‘LIBOR Scandal’; resulted in regulators for the United States, the United Kingdom and the European Union fining banks more than $9 billion. LIBOR underpins over $350 trillion worth of transactions each year, of which about $200 trillion consists of derivatives, mortgages and, of particular of concern here, syndicated loans. To get a better sense of the magnitude of LIBOR-based transactions, it is useful to consider that the amount of annual transactions under LIBOR totals about five times the gross domestic product (GDP) of the entire world. In 2017 statements by the chairman of the Bank of England led to increased momentum to replace LIBOR. On April 3, 2018, the Federal Reserve Bank of New York (New York Fed) began publishing a new rate called the Secured Overnight Financing Rate (SOFR) which has the potential to be a replacement for LIBOR. However, as discussed below, it is far from certain that SOFR is the best suited rate to replace LIBOR in the syndicated loan market.

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