Important Notice: New Base Rate to Replace Retired LIBOR
By Julie Leicester May 25, 2023
For many of our customers, the London Interbank Offered Rate (LIBOR) is the index used to determine the base rate of interest charged on any lease using a floating rate lease schedule. LIBOR has been the most broadly accepted floating rate benchmark in U.S. and global financial markets for decades; however, after concerns about the integrity of the rate, global regulators and market participants have been working for years to transition away from LIBOR to a benchmark that is more liquid and transparent.
After June 30th, 2023, LIBOR will no longer be published which necessitates a transition to a different base rate/index for floating rate leases. As a result, we will transition to a new benchmark rate in our lease agreements.
The Federal Reserve, through the Alternative Reference Rates Committee (ARRC), has identified the Secured Overnight Financing Rate (SOFR) as the rate that represents the best practice for use in financial contracts and as its preferred alternative to LIBOR. With an underlying transaction volume around $1 trillion per day, SOFR is a transparent rate that is representative of the market across a broad range of market participants and protected from attempts at manipulation.
The ARRC further recommends that lenders add a spread adjustment to account for the historical difference between LIBOR and SOFR so that the change in base rate is economically neutral to borrower and lender. This spread adjustment – which varies from 3.8 basis points to 71.5 basis points depending on the applicable tenor – is based on historical 5-year median spreads between LIBOR and SOFR.
Based on the ARRC’s guidance and the broad acceptance of SOFR in the financial markets, Wheels has determined SOFR to be the most suitable benchmark rate to replace LIBOR in our lease agreements. Therefore, effective July 1, 2023, the applicable LIBOR based rates used to determine the floating rate lease rate will be replaced with the equivalent term SOFR rate plus an applicable spread adjustment. Any contractual adder specified in lease agreements will continue to apply without modification.
For affected customers, the rate replacement described in this notice will first be reflected on July 1, 2023, invoices. All other terms under your lease remain unchanged.If you have any questions about the transition to SOFR, please contact your Wheels Account Manager or Fleet Consulting Executive.