If you’re reading this, you already have a sneaking suspicion that there is a lot of work to do between today and the day LIBOR finally goes dark. As we discussed last week, the potential consequences are substantial and wide-ranging, but luckily there are also many options during this transitional period.
As you might have guessed, one of those options is ContraxSuite. With ContraxSuite, you have your own personal Sherlock Holmes, pre-trained to read contracts and “speak financial.” Our contract analytics software can read and categorize contracts, sniff out potentially affected clauses, and even identify and insert proposed amendments on its own.
But maybe you’re not sure yet whether you need to hire the world’s greatest detective for this. Maybe your organization doesn’t have this type of agreement, or maybe your agreements are safe? So, let’s take a step back and answer a few simple questions, beginning with the difference between fixed rate loans and floating rate loans.
A Case Of Identity: Fixed Rate vs. Floating Rate
To understand what types of agreements are affected by LIBOR’s transition, we need to understand more about the types of interest rates used in them. Every credit agreement has some way of charging interest or a financing fee; most people are familiar with these concepts from their savings account, credit card, auto loan, or mortgage, and credit agreements are fundamentally no different.
In a nutshell, there are two ways that interest rates are set in contracts, from your auto loan to a 3 billion dollar credit agreement – either a fixed rate, or a floating rate. Fixed rates are pretty straightforward. Under normal circumstances, a “fixed” and unchanging rate is applied for a given period. For example, fixed rates are generally expressed like “5 percent per year” or “0.75% per month.”
Floating rates are a bit more complicated. A floating rate loan is expressed as the sum of two rates for a given period. These two rates have special names, which vary somewhat by industry but are generally referred to as the “benchmark” (reference or index), and the “spread” (margin). The primary advantage of a floating rate loan is that the “benchmark” generally reflects the fair borrowing costs today. As time goes on, though, a floating rate will adjust as borrowing costs increase or decrease. This is the key difference between a fixed rate and a floating rate. A fixed rate does not change; a floating rate can potentially change every day.
In Quest Of A Solution: Does LIBOR Affect Me?
Not all credit agreements will be affected by the LIBOR transition. Does your organization even “have” affected contracts? Maybe. Probably. If you’re a company that has raised debt capital (a borrower), that lends capital or sells goods (a lender or seller-financer), or that buys and sells credit instruments (an asset manager), then you probably have credit agreements, or at the very least you have contracts with credit provisions somewhere inside.
LIBOR is the most commonly used benchmark in floating rate contracts. But not all contracts are floating rate contracts, and not all floating rate contracts use LIBOR as the exclusive benchmark. So, if Sherlock Holmes sifted through your agreements, he might deduce some rules like this:
Multiply this simple flowchart by however many contracts your organization has, and that’s a lot of paper (and re-papering). You may need to process a high volume of documents in a relatively short timespan. Now that you have a better idea of what you’re looking for, though, it’s time to put ContraxSuite on the case.
In response to the growing need for LIBOR-related contract analytics, we’ve begun to build a LIBOR-focused version of ContraxSuite. Trained on tens of thousands of financial contracts, ContraxSuite can find and label important LIBOR-related clauses, including fallback provisions. Contact us to find out more about how we can help your organization navigate the LIBOR transition (or scroll to the contact form at the bottom of this page). Click here for Part 1 of this series.
LexPredict is an enterprise legal technology and consulting firm, part of the Elevate family of businesses. Our consulting teams specialize in legal analytics, legal data science and training, risk management, and legal data strategy consulting. We work with corporate legal departments and law firms to empower better organizational decision-making by improving processes, technology, and the ways people interact with both. We develop software and data tools, including ContraxSuite, LexSemble, CounselTracker, and LexReserve, that assist organizations with contract analytics and workflows, early case assessment and decision trees, outside counsel spend management, and case valuation. Discover more at lexpredict.com.