May 17, 2023 - US Panel LIBOR is ending on June 30th, so today’s LIBOR transition panel at the LSTA/DealCatalyst CLO Conference is hopefully (nearly) the last one. And with just 45 days left, we are trending in the right direction; Slide 3 on the panel’s presentation shows that 40% of loans and 20% of CLO liabilities already are on SOFR – but this actually understates transition activity on the CLO side. Most managers are organizing their notices in preparation for LIBOR cessation, which is when they can actually pull the trigger. Meanwhile, loans are amending to switch to SOFR at an ever-faster pace (Slide 4). There were $80 billion of amendment fallbacks in April and $59 billion month to date in mid-May. All told, LevFin Insights has tracked some $240 billion of LIBOR fallback amendments since February. As for economics, Slide 5 demonstrates that there hasn’t been a consistent “CSA” trend in 2023, though in April, the majority of tracked fallback amendments used the 11/26/43 bps construct.
With the data under our belt, we moved to a (nearly) 360-degree view of transition; we had a perspective from the manager, investor, trustee and counsel sides. First, there still is wood to chop. The trustee noted that there still were nearly 500 CLOs for which they were trustee that needed to fall back to SOFR (though, per above, most had prepared). From the manager side, it just has not been easy managing the loan transition process (because there is uneven communication from the borrowers and hundreds of fallback amendments in process) while still keeping their investors up to date. The investor side concurred that they want their managers to reach out more proactively. From an economic perspective, the CSA has clearly been a point of contention between CLO debt investors (who want the full 26 bps CSA) and equity (who want markedly less). Still, panelists felt that the large majority of CLO liabilities would go to SOFR+26 bps, whether through fallback language or, ultimately, the LIBOR Act.
And, while we’re almost done with LIBOR transition, there is one place where LIBOR might come back to haunt us. Almost unbelievably – but really! – if institutional loans are deemed to be securities (under the Kirschner litigation), new loans might not be able to use Term SOFR. Here’s why: Several weeks ago, the ARRC refined and republished its best practice recommendations for the use of Term SOFR. Business loans are permitted to use Term SOFR and, therefore, securitizations of business loans also are permitted to use Term SOFR. However, the ARRC explicitly said that if loans were securities and issued as 144a notes, then they would not be in the Term SOFR use case. This could push new (144a-style) loans and CLOs to Daily Simple or Daily Compounded SOFR – an approach that was viewed as wholly unfeasible. Thus, the LIBOR transition may continue to haunt us, well after LIBOR itself is dead.