Podcast: LIBOR Is Out, SOFR Is In for Reference Rate Reform

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Key Points:

• SOFR should be a more stable reference rate.
• The new rate is transactional and data-based, which cannot be manipulated like LIBOR has been in the past.
• This will impact those in real estate who borrow money using floating rate debt.

Reference rate reform is happening. LIBOR is out the door, to be replaced by SOFR. To discuss this significant transition, Weaver Beyond the Numbers Real Estate Edition hosts Howard Altshuler, Partner-in-Charge, Real Estate Services and Rob Nowak, Partner, Tax Services spoke with their colleague Bruce Zaret, Partner, Risk Advisory Services.

So, why is LIBOR out? Zaret explained that “in the 2008 financial crisis, there was a lot of reliance on LIBOR, but it’s a rate that can be altered or manipulated. SOFR should bring more stability since it’s based predominately on repo transactions.”

While LIBOR was forward-looking, Zaret noted that the new rate SOFR is more transactional and looks at an average over time. It’s also based on actual data, and banks can set a cap so that it’s not too volatile. “We expect it to be more reliable and predictable. It’s not based on future projections that are more prone to speculation and basically a group’s opinion,” he added.

The holder of this data will be the Alternative Reference Rates Committee, which includes primarily private organizations in the financial sector. They will dictate the rollout of the rate. LIBOR is expected to sunset at the end of 2021, but Zaret mentioned that it may be pushed out to 2023 because people aren’t prepared for it.

On the implications, Zaret said that, “looking at it from a contractual perspective, it may require more collateral. You could have gains or losses, but it will impact the overall financial structure. For banks, it will change the products they offer. There may be a difference in rate during the transition period.”

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