October 31, 2017 - (article updated on November 2, 2017) – On October 30, 2017, the LSTA, along with a number of other trade associations, submitted a comment letter in response to the Federal Reserve’s “Request for Information Relating to the Production of Rates”. Behind that unprepossessing title is one of the first public steps in possibly moving from LIBOR to a new reference rate for syndicated loans. The next public event occurred on November 2nd, when the Alternative Reference Rates Committee (“ARRC”) held a public roundtable to discuss SOFR as a LIBOR alternative. The LSTA joined a panel on LIBOR and cash products.
Because there are so many constituencies in the syndicated loan market – and some may be overlooked as ARRC works on any transition from LIBOR – the LSTA letter first described a number of loan market stakeholders. These include borrowers, banks as lenders, banks as agents, non-bank lenders, and investors in non-bank lenders like CLOs. We flagged concerns that some these stakeholders could have. For instance, corporate entities have borrowed more than $4 trillion in the U.S. syndicated loan market. They presumably would not want their interest costs to increase simply due to a transition to a new rate and they may also want to continue to be able to hedge without basis risk. In addition, many borrowers benefit from having simple multi-currency facilities based over the IBORs. Non-bank lenders, like CLOs, SMAs and loan mutual funds, have lent around $1 trillion; they presumably would not want their interest income to shrink simply due to a transition to a new rate. Additionally, CLO investors also want to ensure there is no basis risk between their assets (syndicated loans) and floating rate liabilities. Banks as lenders often use LIBOR as a “cost of funds” reference rate; they may want a replacement rate to retain this concept. Meanwhile, banks acting as agents also calculate interest payments and operate payments systems. Any migration to a new rate could impact these systems. As discussed last week, the LSTA feels that, in the loan space, all market participants and lenders should have the opportunity to have a say as LIBOR is replaced.
After describing the various loan market constituencies, the LSTA letter moved on to address specific questions. When speaking of SOFR (and other repo rates), the Fed asked, “Are there any changes to one or more of the rates that would make them more useful? For what purpose?” The LSTA letter highlighted the fact that there could be many loans outstanding when LIBOR is discontinued that do not have an easy mechanism to switch from LIBOR to a new reference rate. To minimize the disruption to loans, the LSTA and its members noted that it would be helpful to have term fixings for SOFR (which is an overnight, secured repo rate) and a bank credit risk spread (which is embedded in LIBOR, but not SOFR) published if and when LIBOR is discontinued.
The LSTA letter is available here; in addition, CREF-C, the LMA, SIFMA and Financial Services Roundtable and SFIG all submitted letters. All letters will be available here as the Fed publishes them. The LSTA appreciates the efforts from our sellside, buyside and CLO investor working group members, as well as Clifford Chance, who drafted much of the letter.