At this point, most lenders know that LIBOR is likely to cease shortly after the end of 2021 and the Secured Overnight Funding Rate (“SOFR”) is very likely to be the replacement rate for syndicated loans and CLOs. While we know that, a major question remains.
Broadly syndicated loans to non-investment grade U.S. Corporations are widely misunderstood outside of the loan industry. A number of commentators imply that leveraged loans are shadowy corporate equivalents to pre-crisis sub-prime mortgages. This is clearly not true and, to respond to such conflations, the LSTA recently published this white paper addressing these views.
This week, we start off by briefly reviewing the US leveraged loan market to date in 2019. We then turn to LIBOR and SOFR, and flag (spread adjustment) progress being made (really!). Finally, we shift to the intersection of the courts and DC to discuss why Volcker and litigation might limit banks’ ability to invest in […]
As we noted recently, because of recent litigation over whether term loan Bs should be considered securities, the implications for CLOs of the current interpretation of the Volcker Rule have suddenly become a critical issue. Fortunately, the SEC and a number of banking agencies are currently deliberating over potential amendments to the Volcker Rule providing an opening to address this potential issue.
This week, we start off pondering the August secondary slump (but console ourselves with the YTD 6.5% return). We then turn to CLOs by: 1) analyzing their ownership and runnability and 2) defending them in the press. And what’s a week without LIBOR? We end with the latest (accounting) hurdle to LIBOR transition being knocked […]
There have been the periodic comments that i) no one knows who owns CLO notes and ii) this might mean fire sales in a downturn. We want to tackle both these narratives head-on. To do so, we first review literature that reveals the owners of CLO notes and then we highlight recent analysis on how these holders likely will behave in a downturn. Spoiler: We know many of the holders and they’re unlikely to be forced to unwind positions.
This week’s issue covers SOFR Trends; Volcker, Litigation & CLOs; Trading Stats; LIBOR Tax Guidance
Our own Lee Shaiman, executive director of the LSTA, recently contributed a by-lined article on the health of the CLO industry to Pensions & Investments. The outlet is a leading, go-to news source for institutional investors such as pensions, endowments, insurance companies and similar entities. The article explains that there are a number of reasons why CLO notes should remain attractive investments within well-diversified portfolios.
On August 20th, the Federal Deposit Insurance Company (FDIC) and the Office of the Comptroller of the Currency (OCC) separately approved final rules amending rules originally published in November 2013 that implemented the Volcker Rule. Importantly, while those amendments do not affect loans and CLOs, the agencies signaled that amendments to the part of the Volcker Rule pertaining to CLOs would be forthcoming sometime in the future.
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).
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