LIBOR: Like I Better Obtain (a) Replacement
Did you ever have one of those “wait . . . what?!?” moments when something seemed like it made no sense at all even though . . . it should have? I had one when I read a contract I was signing recently. The terms cited included a figure of several basis points tied to Libor . . . for almost 10 years after Libor allegedly will cease to exist in 2021.
When I asked the preparers what I could expect post-Libor, I was faced with blank stares by some very handsomely compensated senior financial executives who you’d think would be ashamed not to have an answer.
Because signing the contract was integral to the smooth operation of my family’s life as they know it, I signed.
But it left me somewhat . . . queasy? What exactly is going to replace Libor? When my very expensive representatives gathered their thoughts, they started saying things like, “Well, we think mortgages will use the secured overnight financing rate (SOFR).” Because I had not signed a mortgage and the asset in question wasn’t in the United States, this really didn’t provide much comfort.
My personal favorite response was along the lines of, “No one’s ready so it probably won’t happen in 2021, maybe not even until 2024” (which would still be in the middle of my contract). But if it does happen in 2021 aren’t we cutting it a little . . . well, close?
I’m covered in the sense that the contract calls for my 100% consent if it’s modified. But that contingency language doesn’t really help. What will the new benchmark be? How will it work? Can it be hedged in the same way? Who’s in charge?
I walked out of my meeting thinking that Libor had taken on a whole new meaning for me: not just “Like I Better Obtain (a) Replacement” but also, like I better know when, I better understand it, and I’d like to know pretty soon.
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