A number of loans in Popular’s portfolio bear interest at a variable rate based on the London Interbank Offer Rate (LIBOR). LIBOR is a benchmark rate that has been widely used in financial instruments. However, by June 2023, the global financial industry will complete a transition that will lead to the discontinuation of LIBOR.
If your loan uses the LIBOR rate and it was issued in recent years, it is very likely that your loan documentation already provides for the use of an alternative reference rate in the event that LIBOR disappears. However, it may be the case that your loan uses the LIBOR rate as a benchmark, and it does not include such a provision. If that is the case, action will be required to transition your loan to a substitute rate.
Why is LIBOR being discontinued?
Banks have used LIBOR as a benchmark for their financing costs. LIBOR is an average of the reported interest rates at which global banks estimate they would lend money to each other in a non-guaranteed basis. However, banks implemented changes in the way they obtain financing, thus diminishing their trust in LIBOR as a benchmark for their financing costs. As a result, LIBOR’s regulator has announced that it will no longer compel global banks to report such rates after 2021. This means that there is no certainty that LIBOR will be available after 2021.
In light of such uncertainty, the global financial industry is working to transition away from LIBOR to other benchmark rates by the end of 2021. This transition will impact the price calculations of existing LIBOR-based financial instruments such as loans, deposits, and derivative contracts. Parties to such financial instruments will have to determine the alternate rate they will apply as a replacement for LIBOR and how they will carry out said replacement. The global financial industry is currently working towards establishing the alternate benchmark that will be widely accepted as the equivalent substitute for LIBOR.
What should I do?
You should review your loan documentation and identify if it bears a variable rate. If your loan uses LIBOR, you should contact your Relationship Officer, who will work with you to proactively transition your loan to a replacement rate. This way you will avoid any disruption as a result of the discontinuation of LIBOR at the end of 2021.