LIBOR Transition

Many loans and financial derivatives have interest rates that are linked to a market-based interest rate, referred to as a reference rate. LIBOR, known as the London Interbank Offered Rate, was the dominant reference rate used to indicate the estimated cost at which certain large, global financial lending institutions (“Contributor Banks”) could obtain unsecured funding for seven different tenors (overnight, one-week, one-month, two-month, three-month, six-month, and 12-month tenors) and for five different currencies (USD, GDP, EUR, CHF, and JPY). LIBOR rates were determined by an administrator, the ICE Benchmark Administration (“IBA”), based on information provided by each Contributor Bank.

Over the past decade, domestic and international bank regulators had expressed concerns about LIBOR, particularly the accuracy and legitimacy of the LIBOR reference rates quoted by each Contributor Bank. The decline in the number of Contributor Banks combined with the decline in inter-bank lending and a lack of transparency in determining the reference rate created pressure to identify and transition to an alternative reference rate for financial instruments indexed to LIBOR.

The primary regulator of many LIBOR Contributor Banks, the United Kingdom’s Financial Conduct Authority, announced all sterling, euro, Swiss franc, and Japanese yen, and the 1-week and 2-month U.S. dollar LIBOR settings would cease after December 31, 2021. The remaining U.S. dollar LIBOR settings will cease after June 30, 2023.

In the U.S., the Federal Reserve created the Alternative Reference Rates Committee (“ARRC”), which was tasked with identifying potential alternative reference rates to LIBOR. On July 29, 2021, the ARRC recommended CME Group’s Term Secured Overnight Financing Rate (“Term SOFR”) as a replacement reference rate for LIBOR, primarily for U.S. dollar transactions.

More information on ARRC’s recommendation of CME Term SOFR can be found on the Federal Reserve Bank of New York’s website.

SOFR is an interest rate index based on the cost of borrowing cash overnight collateralized by Treasury securities. The CME Term SOFR is a daily set of forward-looking interest rate estimates calculated and published for 1-month, 3-month, 6-month, and 12-month tenors, as published by the CME Group.

More information about CME Term SOFR is available on the CME Group website.

All debt securities indexed to LIBOR where the replacement is determined by Farmer Mac automatically transitioned to a rate based on a SOFR index plus the spread adjustment. The alternative reference rates and spread adjustments will be applied for interest rates that are determined after June 30, 2023.

More information related to Farmer Mac’s debt securities indexed to LIBOR can be found in the Debt Investor section of Farmer Mac’s website.

The LIBOR index for impacted Farmer Mac Farm & Ranch loans was replaced with the Term Secured Overnight Financing Rate (“Term SOFR”), published by CME Group Benchmark Administration, Ltd., plus a spread adjustment based on the tenor of the interest rate period.

This change is consistent with the approach outlined by the Adjustable Interest Rate (LIBOR) Act and the Federal Reserve Board’s implementing rule (collectively, “the LIBOR Act”). The alternative reference rates and spread adjustments are being applied for interest rates that are determined after June 30, 2023.

More information about the credit spread adjustments is available on the Federal Reserve Board’s final rule to implement the LIBOR Act.

The United States Congress passed the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) and the Federal Reserve Board adopted regulations thereunder to protect against legal uncertainty and adverse economic impacts that may occur in financial contracts referencing LIBOR once LIBOR is discontinued by providing a statutory fallback provision and safe harbor that will be included by operation of law in the terms and conditions of financial instruments that do not have adequate fallbacks to address that LIBOR is no longer available after June 30, 2023.

Additional information about the LIBOR Act, including the tenor spread adjustments, is available on the Federal Reserve Board’s final rule to implement the LIBOR Act.

LIBOR and other floating interest rate indices like Term SOFR use different methodologies. There may therefore be differences between the published rates of benchmarks even at similar tenors. In order to better align its Term SOFR rates to LIBOR rates, Farmer Mac utilizes the spread adjustments outlined in the LIBOR Act, which are based on the tenor of LIBOR.

Additional information about the LIBOR Act, including the spread adjustments, is available on the Federal Reserve Board’s final rule to implement the LIBOR Act.

Farmer Mac sellers or borrowers with questions about a loan indexed to LIBOR should contact the Servicer assigned to the loan.

Questions related to Farmer Mac securities can be sent to fixedincomeinvestor@farmermac.com