Many businesses have term loans, lines of credit, or other debt instruments that have variable interest provisions tied to the London Interbank Offered Rate (LIBOR). This is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans. The financial institutions industry and financial accounting standard setters have been preparing for the eventual transition away from LIBOR as a benchmark rate by the end of 2021. In the U.S., the Alternative Reference Rates Committee (“ARRC”) is working on creating a new rate. The Secured Overnight Financing Rate (“SOFR”) is the preferred alternate rate identified by the ARRC. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. The use of SOFR will become more prevalent in 2020 as the volume activity in this market grows and reliable indices and reporting structures emerge.
The Financial Accounting Standards Board has been deliberating on changes to accounting standards designed to smooth the transition from LIBOR to an alternative rate for agreements that are in place at the time a new interest rate structure becomes necessary. These changes are expected to be finalized in the first half of 2020.
As you look to renew your existing debt agreements or enter into new agreements over the next 18 months, we encourage you to discuss the use of LIBOR or an alternative rate with your lender and their position on transitioning to a rate other than LIBOR during the period covered by the debt agreement. In some cases, your existing agreements may already have provisions that specify how the elimination of the benchmark LIBOR rate would be treated.