October 14, 2020 - With fewer than 100 days left in 2020 we know you’re thinking “this year can’t end soon enough!” Our current experience reminds us that we can never anticipate every risk or be prepared for what life will offer. But we in the loan market are a resourceful lot and while our lives have been disrupted, we’ve remained resilient and are moving forward. Our markets have made adjustments and, for the most part, stabilized. Credit conditions are difficult, ratings have been cut and bankruptcies are rising, but most borrowers are managing liquidity and meeting their obligations, credit spreads have been tightening since the spring and loan trading flows are meeting liquidity needs. On the investor side, mutual fund redemptions have slowed to a trickle, large allocators have targeted bespoke allocations to credit, and CLO issuance, while not pace setting, is steady.

The LSTA has made significant adjustments too. Working from home has gone well. Our work day seems to have extended as we live, virtually, on Zoom®. Our small band, a hard working group under normal circumstances, rose to the challenge by interacting with policy makers, interpreting new regulations and reflecting the needs of the membership. The LSTA board and many of you have been with us every step of the way.

Staff has worked with many of you on operational concerns, as agents and lenders moved to working remotely during an unprecedented market sell-off and record setting trading volumes as $120 billion in par amount of loans changed hands in March alone.  When Congress, with lightning speed, passed the CARES Act, we were on top of it.  But Congress left many of the details to the executive branch and the regulators, and LSTA staff were thrust in the midst of it, consulting with regulators, advocating for assistance that would keep borrowers from bankruptcy all while interpreting the new rules and educating our members. In the end, our markets received little in direct assistance from the CARES Act, PPP, the Main Street Lending Program or the extension of the TALF program to CLO AAA tranches. But the actions taken, even if of little direct help, acted like emergency brakes catching a falling elevator car.

Beginning in the second quarter, both pre- and-post-pandemic matters have made claims on staff time. Principal among these is LIBOR replacement, for which we have continued our work with the ARRC and its Business Loans Working Group. The LSTA has been working with market participants on operationalization of the replacement rate as well as the drafting of fallback language (i.e.; the rate your loan will fall back to if LIBOR ceases to be posted). Very recently we published our first concept credit agreement describing a term loan referencing daily simple SOFR or daily compounded SOFR. We are also working on proposed rate amendment language to help remediate CLOs having various or no clear process for rate fallback should LIBOR postings cease. There are numerous other workflows in process on the LIBOR front.

Beyond LIBOR, staff has been occupied on loan market issues ranging from best practices in primary syndication, full scale technology review of vendor offerings aimed at expediting settlement and improving operational efficiencies across the marketplace. A direct result of the pandemic is a marked increased focus, by investors and asset allocators, on how environmental, social and governance factors impact business, markets and investment outcomes. The LSTA published an ESG Diligence Questionnaire in February that has received a remarkable response and significant uptake.

Another important initiative this year was the release of an economic impact study demonstrating the importance of the syndicated loan market to the broader economy. We commissioned this study by John Dunham & Associates in large part to respond to the criticism our market has received in the press and on Capitol Hill. The results of the study were impressive to say the least: it shows that the loan market is responsible for $2.7 trillion in direct economic output, more than 10 million jobs, and more than $747 billion in wages. Moreover, the market has a presence in every congressional district and provides over $288 billion in federal, state, and local tax revenue. This study should give pause to those looking to hamper our market with further regulation.

This year marks the 25th anniversary of the LSTA’s founding. While celebrating in the traditional way is obviously impossible, to commemorate the milestone, our annual conference will move online with a series of daily, one hour webinars between Tuesdays and Thursdays and running between October 20th and October 29th plus a post-election wrap up on November 10th.  The conference will be free of charge to all members of the LSTA. Registration opened on September 14th and the response is already gratifying with over 1,800 registered. There is still time to sign up and I encourage you to join us virtually.

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Membership in the LSTA offers numerous benefits and opportunities. Chief among them is the opportunity to participate in the decision making process that ultimately establishes loan market standards, develops market practices, and influences the market’s direction.

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CLO & LIBOR Risks and Recommendations

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LIBOR: Remediation Animation

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