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LSTA Newsletter: August 16, 2019

This week we cover LIBOR-Good News and Less Good News; Docs Terms of Use; Delayed Comp Docs Released; Loans Mag Announcement

LIBOR Fallbacks: Good News… and Less Good News

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).

CLOs & LIBOR: Hardwired Fallbacks Appear

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.

FASB: More LIBOR Relief

The Financial Accounting Standards Board has agreed to issue additional LIBOR transition relief, providing the loan market assurance that the accounting body will address the major accounting issues presented by the transition.

LIBOR: The SEC Speaks

A number of global regulators have been warning institutions that i) LIBOR is ceasing, ii) transition plans are critical and iii) it’s (past) time to move on to a new rate. Last Friday the SEC added its voice in a joint eight-page Staff Statement on LIBOR Transition. This is not simply theoretical.

LIBOR FAQs

LIBOR, “the world’s most important number”, is likely to cease after 2021. This presents significant—but hopefully surmountable—challenges. We discuss the LIBOR problem, timeline and potential shorter- and longer-term solutions. We discuss the LIBOR problem, timeline and potential shorter- and longer-term solutions.

LIBOR Fallbacks: Are Loans and CLOs Aligned?

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.

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