Cutting Through The Index Confusion Facing Borrowers

<p>Borrowers need to understand exactly what product they are getting from a bank before LIBOR goes away at the end of 2021.</p> <p>Explains Thirty Capital Analyst Jay Saunders: “Understand what your lender is proposing. Pay a lot of attention to what your fallback index is . . . what your index will be once LIBOR goes away, because it will go away at the end of the year.”</p> <p>Currently, there are a number of competing indexes for LIBOR. Lenders need to understand what the indices are, and what each one represents.</p> <p>“Try to get a grasp on that pretty early in the process and know what your options might be. I think a lot of people talk about this like there is room to negotiate that with your lenders,” Jay cautions.</p> <p>Chances are, there won’t be room for negotiation. A bank will pick an index and go with it.</p> <p>Hedging entities need to determine whether they can hedge the index. If they can hedge it, what kind of liquidity will they have in the market for those hedges?</p> <p>Jay acknowledges that there are lenders who don’t like SOFR because they believe it does not represent their true cost to fund loans. He thinks such lenders will likely acquiesce around a SOFR alternative—most likely Bloomberg’s BSBY index.</p> <p>THE FLOATING RATE MARKET</p> <p>Banks are starting to originate SOFR-based products, and are also trying to scope out what’s happening in other banks.</p> <p>Jay believes some new products are adding more confusion and noise to the market.</p> <p>“Last week we had yet another entrance into the short term rate market. IHS Markit came out with a credit-sensitive, LIBOR-like index,” he explained. “They call it a CRITR. They also published a credit-sensitive add-on that they say can be tacked on top of SOFR to create something that looks like LIBOR.”</p> <p>INFLATION AND EMPLOYMENT</p> <p>The two big indicators influencing much of the economy at the moment are inflation and employment.</p> <p>But both have been impacted heavily by the pandemic, and so there are no easy solutions - or