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LIBOR Fallbacks: Good News… and Less Good News

There is good news – and less good news – on LIBOR fallback language in cash products like loans, FRNs and CLOs. On the good news front, it looks like most cash products are now including fallback language in new deals. This is critical because many instruments will be outstanding when LIBOR ends after 2021, and if they don’t have good fallback language, there could be contract frustration (and litigation). However, on the less-good-news front, the fallback language is not always consistent (which may lead to a lot of work to determine exactly how each instrument would fall back) or workable en masse (which may lead to traffic jams as everyone tries to amend their deals at the same time). We discuss the fallback status of FRNs and loans below. (And we’d gently remind readers that several CLOs have gone “hardwired”, per LCD and Covenant Review).

Primary Delayed Compensation: Drafts Released

Yesterday, the LSTA released drafts of the LSTA trading documents to be used in connection with the new Primary Delayed Compensation Protocol. Below, please find links to the clean drafts and blacklines marking the changes to the current versions of the Par/Near Par Trade Confirmation and Standard Terms and Conditions for Par/Near Par Trades.

FAQs: The LSTA Trading Documents’ New Terms of Use

As we previously noted, on May 17, 2019, the LSTA published a new suite of U.S. secondary market trading documents. In conjunction with the rollout of the new documents the LSTA changed the Terms of Use applicable to counterparties who use those documents. Since then, we’ve received many questions about the new Terms of Use and below we answer many of those questions.

Breaking News! Loan Structures Still Typically Tighter Than Bond Structures

The headline above is slightly – but only slightly – tongue in cheek. With all the noise around leveraged loans (and general silence around high yield bonds), one might think that i) loans suddenly have migrated down the capital structure and ii) loan documentation is far worse than bond documentation. In fact, neither is true.

Bankruptcy Roundup XIII: Law and Marijuana

Earlier this week the LSTA hosted the 13th installment (or, in Superbowleese, Installment XIII) of its quarterly webinar roundup of Recent Developments in Bankruptcy Law. As usual, Rich Levin of Jenner & Block spent most of the webinar delving into a number of key recently-decided bankruptcy cases that raise issues of importance to loan market participants (including a case involving pot!)

The Calm Before the Storm

Following two consecutive months in the red, secondary loan market prices finally caught a bid in July. As a result, the average bid level on the S&P/LSTA Leveraged Loan Index (LLI) increased 27 basis points, to 97.06. The move higher pushed the July LLI return to a three-month best of 0.8% as market value returns (0.29%) were positive for just the second time in five months. The Index had returned 6.6% through month-end July, but prices have since softened following an “insurance policy” rate cut by the Federal Reserve and an intensified trade war with China. But while the Dow plunged 760 points on Monday, loans slid just 10 basis points.

CLOs & LIBOR: Hardwired Fallbacks Appear

According to LCD, and illustrated in the COW, there have been at least 145 U.S. CLOs issued thus far in 2019. That represents 145 opportunities to put in stronger, more robust, more workable LIBOR fallback language into CLOs. While most 2019 CLOs used “amendment” fallback language – which might be challenging to execute en masse when LIBOR ends – we were gratified to hear that several recent CLOs included more robust hardwired fallback language. Below, we discuss why good fallbacks are critical and highlight a recent CLO that used more robust, more-ARRC-able fallback language.

SOFR: Fallback Roadblocks Falling?

As the nearby story reports, we are quite excited to see a new CLO with “hardwired” LIBOR fallback language. (Hardwired fallback language is what is being used in FRNs, and generally states that, upon LIBOR cessation, the contract falls back to a version of SOFR plus a compensating spread adjustment.)

Custody on Loans, Year 4

Last week was a busy one for the LSTA in its continuing engagement with the SEC’s Division of Investment Management (“IM”) on the issue of whether registered investment advisers that trade loans and other assets that do not settle “delivery versus payment” (“DVP”), have “custody” of client assets under the Investment Advisers Act (the “Act”) and therefore must comply with the requirements of the custody rule. Why do we care? The custody rule has four central safekeeping requirements, the most onerous and relevant of which is the requirement that advisers that have custody engage an independent public accountant to conduct an expensive and burdensome annual surprise audit to verify client assets.

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LIBOR Fallbacks: Good News… and Less Good News

There is good news – and less good news – on LIBOR fallback language in cash products like loans, FRNs and CLOs. On the good news front, it looks like most cash products are now including fallback language in new deals. This is critical because many instruments will be outstanding when LIBOR ends after 2021, and if they don’t have good fallback language, there could be contract frustration (and litigation). However, on the less-good-news front, the fallback language is not always consistent (which may lead to a lot of work to determine exactly how each instrument would fall back) or workable en masse (which may lead to traffic jams as everyone tries to amend their deals at the same time). We discuss the fallback status of FRNs and loans below. (And we’d gently remind readers that several CLOs have gone “hardwired”, per LCD and Covenant Review).

Primary Delayed Compensation: Drafts Released

Yesterday, the LSTA released drafts of the LSTA trading documents to be used in connection with the new Primary Delayed Compensation Protocol. Below, please find links to the clean drafts and blacklines marking the changes to the current versions of the Par/Near Par Trade Confirmation and Standard Terms and Conditions for Par/Near Par Trades.

FAQs: The LSTA Trading Documents’ New Terms of Use

As we previously noted, on May 17, 2019, the LSTA published a new suite of U.S. secondary market trading documents. In conjunction with the rollout of the new documents the LSTA changed the Terms of Use applicable to counterparties who use those documents. Since then, we’ve received many questions about the new Terms of Use and below we answer many of those questions.

Breaking News! Loan Structures Still Typically Tighter Than Bond Structures

The headline above is slightly – but only slightly – tongue in cheek. With all the noise around leveraged loans (and general silence around high yield bonds), one might think that i) loans suddenly have migrated down the capital structure and ii) loan documentation is far worse than bond documentation. In fact, neither is true.

Bankruptcy Roundup XIII: Law and Marijuana

Earlier this week the LSTA hosted the 13th installment (or, in Superbowleese, Installment XIII) of its quarterly webinar roundup of Recent Developments in Bankruptcy Law. As usual, Rich Levin of Jenner & Block spent most of the webinar delving into a number of key recently-decided bankruptcy cases that raise issues of importance to loan market participants (including a case involving pot!)

The Calm Before the Storm

Following two consecutive months in the red, secondary loan market prices finally caught a bid in July. As a result, the average bid level on the S&P/LSTA Leveraged Loan Index (LLI) increased 27 basis points, to 97.06. The move higher pushed the July LLI return to a three-month best of 0.8% as market value returns (0.29%) were positive for just the second time in five months. The Index had returned 6.6% through month-end July, but prices have since softened following an “insurance policy” rate cut by the Federal Reserve and an intensified trade war with China. But while the Dow plunged 760 points on Monday, loans slid just 10 basis points.

CLOs & LIBOR: Hardwired Fallbacks Appear

According to LCD, and illustrated in the COW, there have been at least 145 U.S. CLOs issued thus far in 2019. That represents 145 opportunities to put in stronger, more robust, more workable LIBOR fallback language into CLOs. While most 2019 CLOs used “amendment” fallback language – which might be challenging to execute en masse when LIBOR ends – we were gratified to hear that several recent CLOs included more robust hardwired fallback language. Below, we discuss why good fallbacks are critical and highlight a recent CLO that used more robust, more-ARRC-able fallback language.

SOFR: Fallback Roadblocks Falling?

As the nearby story reports, we are quite excited to see a new CLO with “hardwired” LIBOR fallback language. (Hardwired fallback language is what is being used in FRNs, and generally states that, upon LIBOR cessation, the contract falls back to a version of SOFR plus a compensating spread adjustment.)

Custody on Loans, Year 4

Last week was a busy one for the LSTA in its continuing engagement with the SEC’s Division of Investment Management (“IM”) on the issue of whether registered investment advisers that trade loans and other assets that do not settle “delivery versus payment” (“DVP”), have “custody” of client assets under the Investment Advisers Act (the “Act”) and therefore must comply with the requirements of the custody rule. Why do we care? The custody rule has four central safekeeping requirements, the most onerous and relevant of which is the requirement that advisers that have custody engage an independent public accountant to conduct an expensive and burdensome annual surprise audit to verify client assets.