USD funding, never a dull moment 

May 27, 2024

The basics of financial markets, the interbank offered rates needed a good haul over after the financial crisis in 2008. Changing the LIBOR (London Interbank Offered Rate) had a tremendous impact on the financial sector, so it took till 2021 to introduce the SOFR (Secured Overnight Financing Rate). A replacement of the Libor. But not?  

One of the major impacts for borrowers of the change to SOFR is that the SOFR does not reflect the credit risk of the party guaranteeing the SOFR 

To monetize this credit risk aspect, the Credit Adjustment Swap (CAS) was introduced. The CAS is a fixed rate that can be added to the SOFR. The aggregate of the SOFR and the CAS is the standard reference rate for a financing in USD. 

Often European banks will add a liquidity premium on top of the margin (spread) you pay for your USD funding. So calculating the cost of your USD funding looks like the following:

SOFR + CAS + Liquidity Premium + Margin = USD Funding cost.  

Doesn’t that feel like paying double on top of more?  

Confirmed! Banks remain reluctant on this, but there is a tendency in larger type of syndications to banks accepting not to calculate the CAS anymore. This trend is fueled by the fact that the SOFR is now being accepted as the new standard rate. The credit risk element seemed to be somewhat overweighted at creation of the SOFR and does not seem to be valued anymore. 

Negotiating your next USD funding documentation? Take this element into account, it can save 11 to 30 bps (depending on the term) on your next USD funding!