1 March 2025 · Risk Free Rates Team
From LIBOR to SOFR: What Borrowers Need to Know
LIBOR was permanently discontinued on 30 June 2023. This guide explains why LIBOR ended, how the transition to SOFR works, and what the credit adjustment spread means for your loan.
The End of LIBOR
For nearly 50 years, the London Interbank Offered Rate (LIBOR) was the world's most widely used benchmark interest rate — underpinning an estimated $300 trillion in financial contracts ranging from mortgages to syndicated loans to derivatives.
All of that changed on 30 June 2023, when the Financial Conduct Authority (FCA) permanently ceased the publication of all remaining USD LIBOR tenors (1-month, 3-month, 6-month, and 12-month). The era of LIBOR is over.
Why Did LIBOR End?
LIBOR was based on daily submissions from a panel of major banks, estimating the rate at which they could borrow unsecured funds from each other. The fundamental problem: on many days, there were few or no real transactions underlying those estimates.
This structural weakness enabled the LIBOR manipulation scandal that emerged between 2012 and 2015, in which traders at multiple banks were found to have colluded to move LIBOR in directions that benefited their trading positions. The resulting fines and prosecutions totalled over $9 billion.
In 2017, the FCA announced it would no longer compel banks to submit LIBOR quotes after 2021. The market had to find a replacement.
Choosing a Replacement: SOFR
In the US, the Alternative Reference Rates Committee (ARRC) — a private-sector group convened by the Federal Reserve and the New York Fed — recommended SOFR as the replacement for USD LIBOR.
SOFR has several advantages over LIBOR:
- It is based on real, observed transactions (~$1 trillion daily) rather than expert estimates
- It represents a risk-free rate (secured by US Treasury collateral)
- It is extremely difficult to manipulate given its transaction volume
- It is published and administered by the Federal Reserve Bank of New York
Similar transitions happened in other currencies: SONIA replaced GBP LIBOR, €STR replaced EONIA (and is now the ECB's recommended rate for EUR), and TONA replaced JPY LIBOR.
The Credit Adjustment Spread
One important difference between LIBOR and SOFR is the credit component. LIBOR included an implicit bank credit risk premium (because it measured unsecured interbank lending). SOFR, being secured and risk-free, is structurally lower.
To compensate for this difference, the ARRC and ISDA (International Swaps and Derivatives Association) established fixed credit adjustment spreads (CAS) based on the 5-year median difference between LIBOR and SOFR:
| Tenor | Credit Adjustment Spread |
|---|---|
| 1-Month | +11.448 bps |
| 3-Month | +26.161 bps |
| 6-Month | +42.826 bps |
| 12-Month | +71.513 bps |
These spreads are added to SOFR in fallback language — they are fixed for the life of the contract, reflecting the historical difference at the time of LIBOR's cessation.
What Happened to Existing LIBOR Loans?
For legacy contracts (those written before SOFR was available), the transition followed one of three paths:
- Bilateral amendment — lender and borrower agreed to amend the loan documentation to reference SOFR directly
- ARRC fallback language — contracts drafted after 2019 often included ARRC-recommended fallback provisions, which automatically switch to Term SOFR + CAS when LIBOR ceases
- LIBOR Act — the US Adjustable Interest Rate (LIBOR) Act (signed March 2022) provided a federal backstop: for contracts with no workable fallback, the rate automatically converts to the relevant CME Term SOFR tenor + CAS
Term SOFR: The LIBOR-Like Alternative
Many corporate borrowers preferred LIBOR's simplicity — the rate was known at the start of the period, making cash flow planning straightforward. Term SOFR, published by CME Group for 1M, 3M, 6M, and 12M tenors, preserves this feature.
Term SOFR is derived from SOFR futures and overnight index swap (OIS) markets and represents a forward-looking expectation of where overnight SOFR will average over the period. It is the most widely used SOFR variant for US syndicated loans.
Note: Term SOFR is a licensed rate — redistributing it in commercial applications requires a licence from CME Group.
Calculate Your Loan under SOFR
Whether your loan uses compounded SOFR in arrears or Term SOFR, our free RFR Loan Calculator can model your interest for any period with full daily compounding, customisable lookback, and Excel export.
We also support SONIA (GBP) and €STR (EUR) for non-USD facilities.