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LIBOR Transition

What you need to know about reference rate reform and the LIBOR transition.

The world banking community has begun the process of replacing LIBOR, the London Interbank Offered Rate, with a more reliable and robust benchmark. This will be a sweeping change as there are approximately $200 trillion in financial contracts tied to U.S. dollar LIBOR. The goal is to move the financial system to a new reference rate while minimizing the impact for those who hold LIBOR-based loans, securities and derivatives.


Market participants will have ample time to adjust to this change. The authorities in the United Kingdom who oversee LIBOR have announced they expect to phase it out by the end of 2021. In the meantime, we at Cadence are starting to prepare our systems to convert to a new reference rate, setting the stage for a smooth transition for our customers. We will keep you informed each step of the way.


See below for more information on the LIBOR transition.


Don't hesitate to contact your Cadence Bank relationship manager should you have questions.



Frequently Asked Questions About the LIBOR Transition


Q: What is LIBOR?

LIBOR is a widely used benchmark for short-term interest rates. It is computed for five currencies, including the dollar, and for seven maturities, ranging from overnight to 12 months. The Federal Reserve estimates there are approximately $200 trillion in financial contracts tied to U.S. dollar LIBOR. This includes business loans, floating-rates notes and bonds, adjustable-rate consumer loans and mortgages, and derivatives.


Q: How is LIBOR calculated

To create U.S. dollar LIBOR, leading London banks submit daily estimates of what they would expect to be charged if they were to borrow cash from other banks for periods ranging from overnight to one year. For each maturity, the Intercontinental Exchange (ICE) eliminates the highest and lowest quartile of responses, averages the rest, and publishes the results each day.


Q: Why is a new benchmark rate necessary?

LIBOR is meant to reflect the cost at which large, globally active banks can borrow on an unsecured basis in wholesale markets. When the British Banking Association (BBA) launched LIBOR in 1986, unsecured lending among London banks was commonplace. Times have changed. In the wake of regulations put in place after the 2008 financial crisis, the frequency of these transactions has declined dramatically. For instance, the Federal Reserve estimates that there are just six to seven actual market transactions each day — totaling about $500 million — underpinning one- and three-month U.S. dollar LIBOR. At longer maturities, there are often none. In other words, LIBOR is now much less representative of the markets it was meant to reflect.


The second weakness is that LIBOR is based on estimates, not real transactions. Banks are asked to estimate the rate at which they could borrow from other banks, not provide rates at which they actually borrowed. In other words, their quotes are hypothetical, which means they can be compromised. Some banks providing LIBOR estimates have been fined billions of dollars for misstating their LIBOR submissions to achieve higher returns.


Q: How is this rate being developed?

In July 2014, the Financial Stability Board, an international body that monitors and makes recommendations intended to promote financial stability, issued a report expressing concerns about the “reliability and robustness” of existing interbank benchmark rates.


In response, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC), a public-private group, to plan the transition away from U.S. dollar LIBOR for loans. Its criteria for LIBOR replacement included methodological quality, accountability, governance and ease of implementation. The International Swaps and Derivatives Association (ISDA) is managing the conversion for derivatives.


Q: What is the new recommended rate?

ARRC has recommended that banks adopt a new rate proposed by the New York Fed in cooperation with the Treasury Department’s Office of Financial Research. It is called the Secured Overnight Financing Rate (SOFR). SOFR measures the cost of overnight borrowing collateralized by U.S. Treasury securities, which is the deepest and most liquid money market in the U.S. Unlike LIBOR, it is based on substantial volume of actual transactions, totaling around $1 trillion daily.


On March 2, 2020, the New York Fed began publishing daily three compounded averages of SOFR over rolling 30-, 90- and 180-calendar day periods as well as the daily index. This allows users to calculate average rates over customer time periods. Visit SOFR Averages and Index Data.


Q: Are there other potential rates?

Yes. These include Prime, a widely used benchmark based on the federal funds rate, and Ameribor which is based on the overnight borrowing cost for financial institutions that transact over the American Financial Exchange.


Q: What new rate will Cadence Bank use?

Currently, Cadence is evaluating which new benchmark rate it will use on renewals and new loans as well as existing loans and is thoughtfully considering the rate(s) that will ensure the greatest flexibility for specific types of clients.


Q: When will LIBOR be discontinued?

In 2017, the United Kingdom’s Financial Conduct Authority (FCA), the agency that regulates LIBOR, reached an agreement with the panel of London banks that provide estimates for LIBOR. They agreed to continue to support the benchmark by submitting LIBOR estimates until the end of 2021. After that time, the FCA will not persuade or compel banks to make LIBOR submissions.


Q: What Is Cadence Bank doing to prepare?

Cadence has undertaken a detailed analysis of our LIBOR exposure and assembled a cross-disciplinary team to oversee and coordinate the replacement process. In addition, we have created a plan to ensure a seamless, orderly changeover while minimizing the financial impact of the new benchmark on the bank and our customers.


Q: What are some of our areas of focus?

We have approached this roadmap from a number of perspectives. These include:


Products: We have identified those products impacted by the change as a first step in redesigning or transitioning LIBOR products and developing products based on a new rate.

Contracts: We have evaluated LIBOR terms and fallback language in existing legal documents as a precursor to standardizing them and amending them where necessary.

Models: We have analyzed our financial and risk management models to identify those requiring updates as a result of the transition.

Systems and Processes: We have determined which of our products and systems reference LIBOR and have begun to consider the necessary changes that would allow those systems to use alternative rates.


Q: What is fallback language and why is it so important?

Fallback language refers to the legal provisions in a contract that apply if the underlying reference rate is discontinued. Because LIBOR is a heavily used benchmark, its permanent cessation without viable fallback language might cause considerable disruption.


The most useful fallback clauses unambiguously provide a clear path to implement a specific non-LIBOR replacement benchmark, with or without a spread adjustment. However, fallback language in existing contracts quite often falls short of that standard. In some cases, it outlines a general process for moving from LIBOR to an unspecified benchmark. In others, it requires parties to the contract to reach out to London banks to provide an estimate of what LIBOR might be or converts the LIBOR-based loan to a fixed rate. Furthermore, contracts often vary in the nature of the event that will trigger a fallback.


Q: What is our timeline for implementation?

During 2020, Cadence will be moving to a new benchmark rate and working with customers to facilitate their transition:


2Q/3Q 2020: Cadence will select new benchmarks for its transactions.

3Q 2020: Cadence will be converting its systems and creating documentation to accommodate its new indexes.

4Q 2020: Cadence expects to begin working with our customers to amend their existing loan documents, establishing a clear path for their transition to the new reference rate. We hope to complete this process by mid-2021.


In the case of syndicated loans, the lead banks will be responsible for working with customers through the LIBOR transition.





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