What Borrowers Should Expect in the Transition to SOFR

Freddie Mac catalyzed the transition to SOFR as the alternative to LIBOR late last year, and already many lenders have followed suit. By the end of the year, it is likely that most lenders will have adopted SOFR language in their loan documents, and borrowers should note the adjustment. Both current borrowers and owners with existing loans could see the change.

“On new loans and certain loan modifications, borrowers can expect to see new alternate index language in their loan documents,” Jennifer Bojorquez at Troutman Sanders tells GlobeSt.com. “We’ve been notified by several lenders in recent weeks of the inclusion of revised alternate rate provisions on new loans and on modifications involving maturity date extensions or payment terms.  On existing loans, and again depending on the terms in the loan documents, borrowers should not be surprised to receive notification from their lenders that their loans are being transitioned to SOFR or that the loan documents need to be modified to address LIBOR termination.”

While the loan language may change, the overall interest rate shouldn’t change at all or in a way that substantially impacts the loan. “The SOFR interest rate number may not be the same as the LIBOR interest rate number, the all-in interest rate (index plus spread) should be roughly equivalent to their existing interest rate,” says Bojorquez.

This is the beginning of the transition, and lenders are giving themselves flexibility to use SOFR as an alternative. “We are seeing that lenders are including in their new alternate rate language the ability to use of SOFR in the event applicable governing bodies have announced that they will use SOFR or the use of SOFR has become generally accepted in the market,” says Bojorquez. “In that regard, lenders are able to opt-in to using SOFR even before LIBOR ceases to be published, which is expected to occur at the end of 2021.”

The transition period, however, will be different for each lender. “Whether the change to SOFR is gradual or sharp for any particular lender will depend on the alternate rate language in its loan documents, i.e., do the provisions allow for early opt-in, and whether the lender decides to begin using SOFR on new loans in advance of the termination of publication of LIBOR,” says Bojorquez. “I expect that many lenders will begin using SOFR on new loans toward the end of this year.”