Successfully Managing the Shift to SOFR in Asset Finance

The London Interbank Offered Rate (LIBOR), which has been the primary global benchmark interest rate for many years, is being replaced due to concerns of manipulation and scandals. The Secured Overnight Financing Rate (SOFR) has been selected as the replacement for the US Dollar LIBOR in the United States. This transition, scheduled for after June 2023, will have significant implications for the financial industry, especially for asset finance companies.
SOFR is a measure of the cost of borrowing cash overnight collateralized by US Treasury securities, based on actual transactions in the Treasury repurchase market. In contrast, LIBOR is an unsecured interbank lending rate that has been widely used in various financial contracts. The shift from LIBOR to SOFR will affect a vast number of financial products, with an estimated $200 trillion worth of contracts referencing USD LIBOR alone.
The transition to SOFR will impact asset finance lessors in several ways. Firstly, they will need to review and amend existing contracts that reference LIBOR to ensure a smooth transition. This process may be complex and time-consuming, requiring clear communication and legal enforceability. Additionally, lessors will need to develop new contracts incorporating SOFR as the benchmark rate for future transactions.