In July 2018, we posted that finance professionals agreed that the Secured Overnight Financing Rate, or SOFR, would be the likely replacement for LIBOR by the end of 2021, when the LIBOR index was scheduled to be phased out. The SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
Well, it’s here. Nearly all CMBS conduit loan term sheets and applications are now incorporating SOFR as the index to be added to the loan spread to determine the interest rate to be locked at closing. The SOFR Swap Rate generally trades in tandem with the 10-year U.S. Swap Rate, but 26 basis points (bp) lower.
The new index is not intended to change CMBS conduit loan interest rates relative to the old Swap index. For now, the typical interest rate language found in loan term sheets and applications is the following:
The fixed annual rate (the “Interest Rate”) shall be calculated at Rate Lock (as defined below) by adding (1) 225 bp (the “Spread”) to (2) the greatest of (a) the 10-year U.S. Swap Rate as determined by Lender or (b) the 10-year U.S. SOFR Swap Rate as determined by SMC, plus a 26 bp adjustment to the SOFR Swap Rate (the “SOFR Adjustment”).
Soon ValueXpress will add the SOFR Swap Rate to the bottom of its website homepage. We currently list the U.S. Swap rates, Libor, Prime, and SOFR (but not the SOFR Swap Rate). We are waiting for the industry to begin publishing the SOFR Swap Rate; we will keep you posted!