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).
This week we cover SOFR Transparency & Hardwired CLOs Emerge; Custody, Year 4!
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.
This week we cover May Trading Stats; LIBOR & Basis Risk; Oh Cannabis; Loans in Tel Aviv
There are $1.2 trillion of institutional loans outstanding, and nearly $700 billion are housed in CLOs. When the reference rate of loans and CLOs are not aligned, basis risk emerges. This was notable – and painful for equity – in 2018 when the 1-month/3-month LIBOR curve steepened to 50 bps and corporate borrowers switched to one-month LIBOR while CLO liabilities continued to reference three-month LIBOR. But basis risk doesn’t stop there; it is an issue to be considered with LIBOR fallbacks as well.
This week we cover CLO Revelations; Oil Patch Lending; LIBOR Accounting Redux; Tax Reform & Loans
Over the past several months, there has been considerable discussion around CLOs, their alleged opacity, their investors and their long-term stabilizing (or destabilizing) effect on financial markets. Below, we recap the debate and reveal the (not so secret) facts about CLOs.
Last Wednesday, LSTA executive director Lee Shaiman moderated a panel at the 7th Annual LPC Middle Market Conference on whether leveraged loans and CLOs pose systemic risk to the economy, an issue that has received a lot of attention in the financial press in recent months.
Become a Member
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.