NEW YORK — A new federal statute tied to the Consolidated Appropriations Act should ease the burden on bank-regulated lenders as the industry prepares for the forthcoming transition away from the London Interbank Offered Rate (LIBOR).
The Adjustable Interest Rate LIBOR Act, which was signed into law March 15 as part of the larger $1.5 trillion Consolidated Appropriations Act, protects deals using LIBOR that don’t have fallback language by automatically transitioning to the Federal Reserve’s term secured overnight funds rate (SOFR), Barbara Goldstein, partner at Mayer Brown, said Wednesday during the IMN – ELFA Investor’s Conference on Equipment Finance in New York City.
Bank-regulated lenders have been under “extreme pressure” to avoid using LIBOR on new transactions starting January 1, Goldstein said, and have until June 30, 2023, to transition from LIBOR on existing transactions.
Under the statute, transactions without fallback language will be transitioned automatically to Term SOFR, she said. “If a person is charged with selecting a new benchmark [and] they choose SOFR or another federally authorized benchmark, they’re not going to have liability and will be protected against claims.”
Already, much of the market has settled on forward-looking Term SOFR, Goldstein said, with about 89% of transactions since Jan. 1, 2022, using the Fed’s benchmark.
Some automakers and captives have already started using Term SOFR. Hyundai Capital America, for one, was the first S&P Global-rated public auto loan asset-backed securitization to include a floating rate indexed to SOFR in November 2021. Ford Motor, too, utilized SOFR when it refinanced three revolving credit facilities in September 2021.
The transition away from LIBOR was first set for 2021, but was halted in 2020 due to the effects of the COVID-19 pandemic. In April 2021, the Federal Reserve laid out its path for securitized issuers to transition.
This story first appeared on Auto Finance News, a publication of Royal Media.