February 9, 2022 | Stamford, CT — The combination of expected interest-rate hikes and the ongoing transition away from Libor pricing could create anomalies in commercial loan pricing in 2022.

The U.S. Federal Reserve said it is likely to increase interest rates in March, and market observers are expecting as many as five or more rate hikes in coming months. Those rate increases would arrive as banks and borrowers are working to transition the commercial loan business away from Libor to SOFR and other pricing benchmarks. 

“Navigating the SOFR transition adds an additional wrinkle when compared to previous periods of Fed action, since banks are still working through SOFR pricing and questions exist on how SOFR will react to these potential rate hikes,” says Erik Wnuck, Director at Coalition Greenwich. “This uncertainty creates the possibility of near-term pricing anomalies and inconsistencies.”

When it comes to newly issued loans, Libor was scheduled for termination at the end of 2021 but was extended to June 2023 for certain U.S.-dollar loans. While the transition to Libor for new originations should be wrapped up in the first half of this year, market participants still have to work through the huge inventory of outstanding loans priced in Libor. New Libor transactions were still making up 40% of deal flow in December 2021. 

Data from Greenwich Commercial Lending Market Insight shows that recent SOFR-based transactions are carrying a premium over similar Libor-based originations. Although that premium is reduced from the 25 basis points observed in September, it still stands at a meaningful 12 bps. 

“The bottom line is that market pricing is entering a period of uncertainty given this combination of potential rate rises, the transition away from Libor to alternate base rates and lingering macroeconomic questions around supply chain issues and inflation, says Erik Wnuck. “Lenders will need to navigate the tradeoffs of competitively pricing to maintain growth expectations against the potential of unsound pricing decisions based on market fundamentals.”

The Q1 2022 edition of the Greenwich Commercial Lending Market Insight examines the impact and status of Libor transition. It also analyses a significant pickup in credit quality for both C&I and CRE borrowers in 2021 and positive signs for loan growth and line utilization.