LIBOR (the London Inter-bank Offered Rate) is an interest rate benchmark published by ICE Benchmark Administration Limited that is used as a reference rate for a wide range of financial transactions. It is a common floating rate interest option for corporate borrowers, who may pay interest on loans based on LIBOR (usually with a margin in excess of LIBOR).
LIBOR has dropped dramatically since the start of the COVID-19 pandemic. For example, one month LIBOR (based on the US Dollar) was approximately 2.5% in early January 2019. While there had been a decrease to approximately 1.8% in late December 2019, and a further slide to 1.7% in mid-February 2020 and 1.6% in late February, by March 12 one month LIBOR had plummeted to .7%. After a slight recovery to 1% by the end of March, this rate decreased to below .2% in early May and has remained there ever since. Rates for other LIBOR periods have seen similar declines, with overnight rates at near zero percent since early April.
Although LIBOR is very likely to be replaced as a reference rate after 2021 (see our blog article at NY Business Law ), there are still many months to go before this happens. In the interim, one area of concern for lenders has been the absence of LIBOR floors in a near-zero rate environment. While language providing for LIBOR to be deemed zero if it would otherwise be negative has been common for some time, the number of loans with floors above zero, and the floor level, have both increased after first quarter 2020.
The following is a summary of LIBOR floors included in loan agreements filed on EDGAR since the start of the year[1]:
| Quarter of 2020 | # of Loans (revolving and/or term) | % with Floors | % with 0% Floor | % with >0% and <.5% Floor | % with .5% Floor | % with >5% and <1% Floor | % with 1% Floor | % with >1% Floor |
| First | 80 | 100% | 90% | None | 1.25% | 1.25% | 5% | 2.5% |
| Second | 110 | 94.5% | 45.5% | 2.7% | 8.2% | 18.2% | 17.3% | 2.7% |
| Third | 88 | 96.6% | 44.3% | 5.7% | 8.5% | 10.8% | 23.9% | 3.4% |
The third quarter of 2020 breaks down as follows:
| Month | # of Loans (revolving and/or term) | % with Floors | % with 0% Floor | % with >0% and <.5% Floor | % with .5% Floor | % with >5% and <1% Floor | % with 1% Floor | % with >1% Floor |
| July | 30 | 93.3% | 36.7% | 3.3% | None | 16.7% | 30.0% | 6.7% |
| August | 30 | 100% | 53.3% | 3.3% | 15.0% | 8.3% | 16.7% | 3.3% |
| September | 28 | 96.4% | 42.9% | 10.7% | 10.7% | 7.1% | 25% | None |
As is clear from the quarterly figures above, deals with a zero percent LIBOR floor have decreased by 50% since first quarter 2020, with floors of 1% or greater having a significant increase during this period. The trend towards 1% LIBOR floors will likely continue in the coming months.
[1] Source: Practical Law.
David Paseltiner is chair of the firm’s corporate and commercial transactions practice group and a member of its banking and financial services practice group. He represents businesses in a wide variety of industries, ranging in size from small start-up operations. He also represents individuals in connection with employment agreements, shareholders agreements and operating agreements. David can be reached at 516-393-8223 or dpaseltiner@jaspanllp.com.