US banks can use Libor in upcoming loan program for small, mid-sized businesses, Fed says

28 May 2020 9:16 pm by Neil Roland

business loan

US banks will be allowed to use the tarnished Libor benchmark in loans issued to small and mid-sized businesses under the pending Main Street Lending Program, the Federal Reserve said, bowing to banks’ requests.

But contracts should incorporate fallback language with alternative benchmarks such as the Fed’s preferred Secured Overnight Financing Rate in case Libor becomes unavailable during the term of the four-year loans, the Fed added.

The Fed said in a question-and-answer document released yesterday that banks reported that transitioning from Libor by the time the lending program is to start in a couple of weeks “would require diverting resources from challenges related to the pandemic.”

“Although financial institutions are transitioning to more robust reference rates, Libor remains the most common base rate used in business lending, even though firms can't rely on Libor being published after the end of 2021,” the 56-page document said.

Regulators have said they can’t guarantee their support for thinly traded Libor after 2021, and have been pushing firms of all kinds to stop using it in their financial contracts.

— Main Street Lending Program —

The Fed’s $600 billion loan-support program is pitched at businesses larger than those at the bottom of the spectrum but smaller than companies that can raise money in capital markets.

Under the Main Street program, businesses with up to 15,000 employees or $5 billion in revenue can get loans of between $500,000 and $200 million. Principal and interest payments will be deferred during the first year of the four-year term.

The Fed plans to buy 85 percent or 95 percent of each loan.

The American Bankers Association said last month that “an abrupt transition to SOFR would deter participation"  in the program.

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