Bank treasurers facing Libor’s end welcome news on a forward rate from the AFX.
Libor’s days are numbered and bank treasurers eager for the development of a forward-looking, term interest rate that has a credit component got some good news last week:
- The American Financial Exchange (AFX) announced an indicative 30-day forward rate called Ameribor30 whose base rate is overnight Ameribor, which reflects the unsecured borrowing costs of more than 1,100 American lenders.
- “I’m pretty excited about it,” one member of NeuGroup’s Bank Treasurers’ Peer Group said during a call with peers. “This is a step in the right direction that we haven’t seen yet.”
- AFX said ServisFirst Bank will use the Ameribor30 rate to price a $20 million loan.
Frustration with SOFR. Some of the enthusiasm for Ameribor30 voiced on the call stems from the frustration of many regional bank treasurers with the development of the secured overnight financing rate (SOFR), the overnight rate alternative to Libor endorsed by the Alternative Reference Rates Committee (ARRC).
- The response by ARRC to banks’ desire for term rates and a credit spread adjustment was met with “that’s your problem, not our problem or charge,” one of the bank treasurers said. “It felt like it was being jammed down banks’ throats.”
- By contrast, he said, Ameribor is “stepping forward—we got something we think could work” so banks can ultimately price term loans for borrowers, including corporates.
How will it work? AFX, in announcing the new rate, said Ameribor30 uses “methodology and transactions” that align “with macroeconomic theory and academic research on the term structure of interest rates.” Another source tells NeuGroup Insights:
- The rate will be computed with a model that uses overnight Ameribor, some sort of commercial credit spread as well as employment rates and an inflation indicator.
- In back testing, Ameribor30 aligned well with Libor but did not “gap out as much as Libor,” the source said.
- AFX is looking at one of the rating agencies to serve as a calculation agent and will have a third party verify the model.
- The new 30-day rate will begin appearing on the AFX website in the next week or two.
