The UK’s Financial Conduct Authority (“FCA”)—the regulator of the ICE Benchmark Administration, the administrator of LIBOR—has said that all sterling, Swiss franc, euro and Japanese yen LIBOR settings will cease or no longer be representative after year-end 2021. The FCA also said that the settings for one-week and two-month USD LIBOR will also cease or will be non-representative after year-end 2021. The remaining USD LIBOR tenors will cease or be non-representative after June 30, 2023. Importantly, while USD LIBOR will continue to exist after the end of 2021, this is only for pre-existing “legacy” contracts. The U.S. banking regulators have said that banks should not originate new LIBOR contracts after the end of 2021.

This year started slowly on the policy front for the LSTA. In fact, this has been the quietest six months for us in Washington since I started at the LSTA two-and-a-half years ago. That’s to be expected, perhaps, given that we’re at the start of a new administration. It’s not a bad thing either; after all, our one constant ask in Washington is to be left alone.

In this whitepaper, the LSTA reviews the official sector’s definitions of systemic risk, characteristics of systemic risk and transmission channels for systemic risk. We analyze leveraged loans and CLOs’ characteristics to demonstrate why they do not post a systemic risk to the U.S. financial system.

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.

A question has recently been traversing the internet: “Could CLO AAA notes suffer significant and troubling credit losses?” In reality, it would take incredible, prolonged and worldrattling levels of corporate loan defaults to actually create any credit losses in CLO AAA notes. One practitioner observed that, if we got to the level of corporate defaults that significantly impaired CLO AAA notes, we’d already be living in caves.

On June 30^th the ARRC published an updated recommendation for fallback language for syndicated loans (“the 2020 recommendation”). We discuss the background and changes below, but want to flag upfront that a major change is that the second step of the waterfall is now Simple Daily SOFR, not Compounded SOFR. For member convenience we have also prepared a word version of the refreshed fallback language which is available below.

LIBOR is somehow simultaneously both a pressing issue and a slow-motion market upheaval. A first step to avoiding the upheaval scenario is the development of fallback language across cash asset classes. (Fallback language answers the critical question “If LIBOR disappeared tomorrow, to what rate would my contract fall back?” Is it Prime? Is it SOFR? Is it the last fixed rate? Is it nothing?!)

A recent internet meme posits that the U.S. banking system is on the precipice of collapse. Today’s catalyst,the Collateralized Loan Obligation or CLO, the theory goes, bears a resemblance to the similarly named CDO, which played a role in the 2008 financial crisis.