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.
As the nearby story reports, we are quite excited to see a new CLO with “hardwired” LIBOR fallback language. (Hardwired fallback language is what is being used in FRNs, and generally states that, upon LIBOR cessation, the contract falls back to a version of SOFR plus a compensating spread adjustment.)
Most U.S. lenders and borrowers realize that LIBOR is likely to end sometime after 2021. However, they are less familiar with SOFR, the Secured Overnight Financing Rate, which will be the fallback for U.S. dollar derivatives and likely will be the fallback for cash products. Thus, lenders are keenly interested in seeing what SOFR actually looks like. To tackle that […]
This week we cover Loans & Systemic Risk Redux; Seeing SOFR; Bankruptcy Roundup
In a recent LIBOR Roundtable co-hosted with Cadwalader, we discussed six steps to leaving your LIBOR. Step 3 is “Know Your Potential Replacement Rates”. The reality is that SOFR, the Secured Overnight Financing Rate, will be the fallback for U.S. dollar derivatives and likely will be the fallback for cash products. Thus, lenders are keenly interested in seeing what the rate looks like.
The past week has been big. After 10 months of work, the Alternative Reference Rate Committee (“ARRC”) released its recommended LIBOR fallback language for syndicated loans and floating rate notes. The LSTA co-chairs the ARRC Business Loans Working Group, was one of the drafters of the loan fallback language, and also has published an easy-to-read explanation of LIBOR fallbacks and a printable one-pager here (after login).
On April 22nd, the Alternative Reference Rates Committee (ARRC) released “A User’s Guide to SOFR”, which discusses the likely end of LIBOR, what it means for cash products, and how cash product consumers (such as syndicated lenders or borrowers) might think about the different variants of SOFR. The LSTA is a member of the ARRC […]
ARRC released a white paper to help explain how market participants can use its recommended alternative to U.S. dollar LIBOR, the Secured Overnight Financing Rate (SOFR), in cash products. This paper builds on the ARRC’s work developing the Paced Transition Plan, which outlines the steps for an effective shift to SOFR.
SOFR and SONIA may be the anointed replacements for LIBOR…but how do you actually make a SOFR loan work? As an ARRC member and Co-chair of the ARRC’s Business Loans Working Group, the LSTA has been in the weeds on this issue. Step One: Develop workable recommended LIBOR fallback language for syndicated loans (coming soon!). Step Two: Help lenders and vendors operationalize SOFR within loan systems.
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