June 8, 2023 - With USD LIBOR only having 20-odd days to live, LSTA members have several questions about what must be done. Below, we briefly recap the state of transition and then flag two key issues: 1) an ISDA LIBOR Q&A that will focus on loan hedging and 2) who can – and cannot – use synthetic LIBOR.
LIBOR Transition Stats: As this slide deck demonstrates, the loan market continues to make material progress toward transition as we approach the end of LIBOR. Slide 2 shows that nearly 40% of loans in the JPM Index were visibly on SOFR as of the end of May and roughly 22% of CLO notes were SOFR-based. We should caveat that the data is lagged, and we likely are substantially further along. Slide 4 shows that visible LIBOR fallback amendments accelerated to more than $100 billion in May, according to LevFin Insights. As demonstrated in Slide 5, the “credit spread adjustment” has been evolving over the course of 2023. Finally, and critically, Slide 6 reviews the fallback language for the remaining loans in the CS Index, courtesy of Covenant Review. More than one-third of the remaining LIBOR loans in the CS Index have hardwired fallback language (so they should automatically transition on June 30th). Over half have some form of “amendment” fallback language. Critically, amendment language varies substantially and, while some borrowers expect to continue to use synthetic LIBOR after June 30th, as we note below, some variations of amendment fallbacks do not permit the use of synthetic LIBOR.
Loan Hedging: On Friday, June 8th at 9 AM ET ISDA will be hosting its LIBOR Q&A call and will be answering questions relating to loan hedging. Kam Hessling of the LMA and Tess Virmani of the LSTA will also be joining. For dial-in details, please click here.
Synthetic LIBOR: We understand that synthetic USD LIBOR – when can it be used, when must it be used – continues to be a point of focus for members. It is an area unfortunately that the LSTA cannot take a view. What seems clear is that synthetic LIBOR will play a role in the loan market’s transition with some credit agreement drafting leading to the use of synthetic LIBOR rates. One related point to keep in mind is the interplay between synthetic LIBOR and ARRC Amendment Approach language. Covenant Review has tracked about 11% of LIBOR loans in the CS LLI with ARRC Amendment Approach language. ARRC Amendment Approach language includes a “pre-cessation trigger” through its “Benchmark Unavailability Period”. Where ARRC Amendment Approach language has been faithfully incorporated into a credit agreement, the use of synthetic USD LIBOR is foreclosed. Because the FCA announcement that USD LIBOR is no longer representative will commence a “Benchmark Unavailability Period” – meaning ABR will be the Benchmark – it is important to understand that unless the loan is successfully remediated, ABR will be used at the next interest reset after June 30th. If this is not the intention of the parties, that loan should be prioritized for remediation to avoid that result.
The way forward: As we approach the end of June, the LSTA remains committed to a successful transition and will remain engaged with members. If there are any questions or common challenges you wish to bring to our attention, please email LIBORInformation@lsta.org.