HOW HAS THE FLOATING RATE NOTE MARKET CHANGED SINCE LIBOR IS BEING PHASED OUT?
LIBOR – the London Interbank Offered Rate – serves as the benchmark for hundreds of trillions of dollars of financial instruments. However, LIBOR Reform is currently in progress with some of the LIBOR fixings halted in December 2021, such as the one-month and twelve-month tenors. The most commonly used tenor is three-month LIBOR, which will continue to be quoted until June 2023.
The market is largely replacing LIBOR with the Secured Overnight Financing Rate (SOFR). SOFR is calculated daily using trades of treasury securities, so it is based on real trade data, not quotes or estimates.1 Many corporate issuers have started issuing FRNs linked to SOFR, and index providers began adding these SOFR linked bonds to their indices in April 2019. Today, over half of the bonds in the Bloomberg Floating Rate Note <5 Years Index are linked to SOFR.2
Many LIBOR linked bonds with maturity dates beyond June 2023 include provisions to designate an alternative reference rate (ARR) when LIBOR is no longer calculated. These bonds may use SOFR or another rate to calculate future coupons. These details are known as “fallback language” and can be found in the bond’s legal documents.