Credit Adjustment Spread
As the market transitions to SOFR, indexes or credit spread adjustments are emerging to help address market participants’ concern that SOFR does not have the embedded bank credit component included in LIBOR. Therefore, the all-in interest rate for a LIBOR-based loan is the LIBOR rate for the relevant term plus the bank’s commercial margin. In contrast, RFRs do not include a credit premium, so the industry is exploring the best possible route to mitigate the “rate difference’ risk and address the divergent
behavior between the benchmarks. The option is to derive a Credit Adjustment Spread (CAS) added to the Risk-Free Rate (RFR). Therefore, the all-in rate for a loan transitioned to Risk-Free Rates consists of three elements: The RFR, the CAS, and the agreed commercial margin.
The cessation announcement of LIBOR on 5 March 2021 (FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks) has resulted in the fixed credit adjustment spreads, and it is expected that a similar approach will be adopted for the CAS in the loan market.
For more information on the reform of benchmark rates, please visit the websites below, or you may reach out directly to your BBK Relationship
Manager. We will continue to update you on further developments on the interest rate benchmark reforms and transitions. The information presented here is not intended to be a complete or exhaustive overview.