LIBOR to SOFR: The Impact of a New Benchmark in Structured Finance
The usage of the U.S. Dollar London Interbank Offered Rate (USD LIBOR) in securitizations and related financial products is expected to cease in December 2021, as banks will no longer be required to provide it. Currently, U.S. securitization transaction documents typically refer to USD LIBOR as the primary benchmark for floating-rate securities. Many transactions have historically also included fallback language provisions (fallbacks) that provide for alternatives if USD LIBOR is unavailable. However, these fallbacks did not necessarily contemplate a situation where USD LIBOR is discontinued. In addition to the usage of USD LIBOR with respect to structured finance note issuances, derivatives included in the transactions may also have referred to USD LIBOR (i.e., for fixed/floating swaps where the basis on underlying collateral differed from that of the issued notes). Finally, underlying floating-rate collateral (e.g., residential mortgages, student loans) may also reference USD LIBOR. A potential replacement for USD LIBOR is the Secured Overnight Financing Rate (SOFR). This commentary discusses the mechanisms and issues associated with the transition from USD LIBOR to SOFR. DBRS continues to monitor, analyze and comment on developments in this transition.
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