SOFR Transition - Your Experience?

Basically what the title says. I am currently working with a handful of bank lenders to convert existing loans with 1-mo LIBOR benchmark to 1-mo SOFR. Apparently 1-mo SOFR can mean many different things. Regardless, all of these loans are swapped and I'm trying to make sense of the different fallbacks for the loan and the swap and understand where lenders may be taking advantage of inexperienced borrowers.

The ISDA fallback is all standard language, the floating leg receives the sum of average SOFR compounded in arrears + 11.448bps spread adjustment (added to approximate LIBOR since SOFR is secured and LIBOR is not). Easy enough. The loans, however, use 1-MO Term SOFR as a benchmark. So the swap pays out based on backward looking rates plus some spread, and the loan is paid on forward looking rates (plus a, sometimes, different spread). In the current environment, for example, Term SOFR includes market expectations of upcoming rate increases, while ISDA SOFR does not account for a rate increase until it has already occurred. I understand that the hedge inefficiency can work to Borrower benefit, as well, but good luck to my accounting team trying to keep track of all of this.

Even besides the inefficiency of the hedge, different balance sheet lenders have quoted different "benchmark replacement adjustments" (credit spread adjustments) to approximate LIBOR. I've seen some lenders lock in 6-8bps, while others have called for the ISDA spread, and even others asking for 15bps. Is this just about who pays (ultimately) for hedge inefficiency? What is your experience negotiating these fallbacks? How is your firm handling the transition?

Appreciate any experience or thoughts you monkeys are willing to share.

Comments (4)

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  • Associate 3 in RE - Comm

Yeah 1M SOFR can mean a few things which is confusing:

  • Daily 1M SOFR - 1 month CME term SOFR rate, reset each business day. not swap-able. no look back.
  • Daily Simple SOFR - overnight SOFR rate published by Fed, reset each business day. Swap-able. 2 day look back
  • CME Term SOFR - available in tenor options of 1/3/6/12 months. I think the 1M Term SOFR here is the most common one being used. Swap-able. 2 day look back.
  • NY Fed SOFR (SOFR in advance) - SOFR compounded averages over rolling 30/90/180 day periods. no look back. 

Regarding your question in the second paragraph.... no idea tbh.

11.448 bps in my view is the default 'benchmark replacement adjustment' which is what we are using at the bank I work at. But inevitably other banks started giving into smaller adjustments, i.e. 6-10bps, so we get borrowers saying "hey XYZ bank is doing 10 bps why do we have to do 11.448." We're able to approve 10bps if someone asks, but try to stick at the 11.448 to be objective. Anything below 10bps is the bank throwing money away IMO. I can't speak for all banks but I really don't think anyone is trying to take advantage of the situation - it's a pain in the ass, we have 1000's of loans to amend...we just want to get it done as easy and quickly as possible.

leftcoastlenny, what's your opinion? Comment below:

We use 1 month term SOFR with an 11 bps adjustment. Transitioning swapped loans is a nightmare. 

Alt+A+W+G, what's your opinion? Comment below:

Same here.  My bank is using 1-month CME Term SOFR plus 11bps.  If someone fusses, we might do 10bps.  We're not trying to get that fraction of a basis point, I just want to get through a pile of them and be done with this whole thing!

Anyone trying to get 15bps out of it is definitely trying to juice it, but the ~4bps may or may not be worth the headache to you...your call there.  4bps is hardly "gouging"

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  • Anonymous Monkey
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Anonymous Monkey, what's your opinion? Comment below:

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