Due to regulatory guidance, PNC can no longer originate new LIBOR-based loans or accommodate certain modifications to LIBOR-based loans.  Clients with LIBOR-based committed facilities which closed on or prior to December 31, 2021 can continue to borrow and maintain loans at contractual LIBOR-based rates until June 30, 2023 (or, if earlier, such time as they request certain amendments to the loan).

PNC and other market participants have implemented various rate alternatives, including the Secured Overnight Financing Rate (SOFR) and Bloomberg’s Short-Term Bank Yield Index (BSBY).

About SOFR:

The Alternative Reference Rates Committee (ARRC), an industry group convened by the Federal Reserve Board and the New York Fed, recommends using the Secured Overnight Financing Rate (SOFR). SOFR is considered a more robust reference rate than LIBOR as it is wholly based on actual transactions and represents an active daily market (over $800B in transactions).

• SOFR is based on transactions in the U.S. Treasury repurchase, or repo, market, where banks and investors borrow or lend Treasuries overnight.
• It is produced by the New York Fed in cooperation with the Office of Financial Research each business day.
  
• SOFR will have multiple variations including daily simple SOFR, term SOFR, SOFR compounded in advance, and SOFR compounded in arrears.
  
• The Alternative Reference Rates Committee (ARRC) formally recommended CME Group's forward-looking term SOFR for use in business loans on July 29, 2021.
• The ARRC released A User’s Guide to SOFR to further explain details about SOFR and how market participants can use it in cash products.

Bloomberg has developed a credit sensitive Short-Term Bank Yield Index (BSBY) based on transaction related data, including both actual executed transactions and firm executable quotes (over $200B in transactions). Commercial lending participants have started to adopt BSBY given it has characteristics more similar to LIBOR.

• BSBY is based on senior unsecured transactions and “seeks to measure the average yields at which large global banks access USD senior unsecured marginal wholesale funding.”
• It is produced by Bloomberg using data from aggregated anonymized transactions and executable quotes of Commercial Paper, Certificates of Deposit, Deposits and senior unsecured Corporate Bonds.
• BSBY is a forward-looking rate available in multiple tenors, including overnight, 1-month, 3-month, 6-month and 12-month.
• Bloomberg has information available on their website to provide additional details on the index

Although LIBOR and SOFR reflect short-term borrowing costs and are available in multiple tenors, they are calculated very differently:

• LIBOR is an unsecured rate, has a credit risk component, is set by panel banks, and may be derived using estimated rates.
• SOFR is a secured rate, is considered risk free, and is based entirely on actual transaction data from the repo market.
• Unlike LIBOR, SOFR is IOSCO compliant (IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation) with over $750B in underlying transactions.
• SOFR is foundationally different than LIBOR, resulting in the need for a spread adjustment. Bloomberg began publishing an indicative spread adjustment (based on the 5 year median spot difference between USD LIBOR and SOFR) in July 2020. Following the March 2021 IBA and FCA announcements, the fallback spread adjustment was fixed, effective March 5, 2021.

BSBY was constructed to be different from LIBOR and designed to meet a market need:

• Unlike LIBOR, which is based on panel bank submission of rates, BSBY is based on actual transaction-related data.
• Unlike LIBOR, BSBY is also IOSCO compliant (IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation). BSBY uses at least a 3-day rolling window of data and includes mechanisms to help ensure it is available through stress.
• Both LIBOR and BSBY are unsecured rates which incorporate a credit risk component.
• Both LIBOR and BSBY are available in multiple tenors.
• Historically, BSBY and LIBOR have tracked closely, including during times of economic stress.

Loan documentation generally provides that if LIBOR is no longer available, the interest rate will be based on the Prime Rate.

Due to the anticipated discontinuation of LIBOR, loans originated or modified in the past couple of years have included fallback language outlining a detailed mechanism to amend the loan documents to incorporate a new reference rate to replace LIBOR, as well as a spread and other adjustments to account for differences between LIBOR and the new reference rate.

As of January 1, 2022, if a client seeks an amendment to an existing LIBOR-based loan that extends the tenor, increases the size or amends the pricing, that amendment will be required to implement a rate other than LIBOR.

For existing LIBOR-based loans maturing beyond June 2023 that do not contain adequate provisions addressing LIBOR cessation, PNC will contact clients to add or amend those provisions  or to move to another replacement rate.

PNC is able to offer swap fallback provisions that will maintain maximum alignment between a client’s swap and existing loan.  In concert with C&IB’s lending strategy, PNC now also has the capability to transact swaps using BSBY and SOFR. 

As of January 1, 2022, PNC will only enter into a LIBOR-based swap with a client if that swap is hedging or reducing the client’s LIBOR exposure on contracts entered into before January 1, 2022.

Related to swap fallbacks: Swap documentation historically has not provided for a fallback rate if LIBOR were to be permanently discontinued. In January 2021, the International Swaps and Derivatives Association (ISDA) finalized an update to its derivatives definitions to include LIBOR cessation fallback provisions. These updates name the LIBOR replacement rate as SOFR (compounded in arrears) plus a spread adjustment based on the 5-year median spot difference between USD LIBOR and SOFR. The updated definitions were published and are effective for any new or amended LIBOR swap contracts executed on or after January 25, 2021.

However, clients have options to choose other fallbacks to preserve maximum symmetry between a loan and associated swap.  PNC loans entered into or amended after November 2020 generally include hardwired replacement provisions that are consistent with those recommended by ARRC (the committee convened by the Federal Reserve Board to focus on LIBOR transition).

• For bilateral loans entered into or amended after November 2020, PNC’s standard hardwired fallback provisions provide that the loan index will automatically transition to Daily Simple SOFR (regardless of whether Term SOFR exists), if there is a related PNC swap that also provides for Daily Simple SOFR as the primary fallback rate, resulting in maximum alignment between the loan and the PNC associated swap.
• For syndicated loans, PNC’s hardwired provisions do not include the revisions described above for bilateral loans given their complexity and the potential for multiple swap providers; those loans will apply the standard ARCC recommended waterfall regardless of the replacement rate provided for in an associated PNC swap in the absence of a specific amendment to the contrary. 

Related to legacy swaps without adequate fallbacks: For existing swap contracts maturing beyond June 2023, PNC will contact clients to amend and incorporate adequate fallback language and replacement provisions.

PNC expects a multi-rate environment to exist following LIBOR cessation. Contracts that have already been updated to include the ‘hardwired approach’ will continue to use SOFR as the replacement rate.

For new loans, PNC recognizes that it is important to offer multiple rate solutions (including BSBY and SOFR) to meet our clients' needs during this transition.  To determine the solution that best meets a client’s specific needs, the different characteristics of each rate should be considered.  Reach out to your PNC Relationship Manager to discuss the replacement rate alternatives.

For foreign currency IBOR rates, PNC has transitioned to the industry recommended risk-free-rates of SARON (CHF), ESTR (EUR), SONIA (GBP) and TONAR (JPY), as required.

No action is required of existing clients that have loans or swaps that include LIBOR replacement provisions. PNC representatives will reach out to clients in 2022 to address updates to legacy LIBOR loans and swaps that still require updates prior to cessation on June 30, 2023. Continue to reference this site for additional resources on the LIBOR transition and industry developments.