October 19, 2017 - The multi-year process to prepare for any possible transition from LIBOR to a new loan reference rate has accelerated to a trot. First, on October 10, 2017, the Financial Stability Board (“FSB”) published its progress report on implementation. Second, in the U.S., the Alternative Reference Rates Committee (“ARRC”) established a business loans and CLO working group to help the syndicated loan market prepare for any transition from LIBOR to a new reference rate. To help educate the general public on these issues, ARRC is hosting a public roundtable at the Federal Reserve Bank of New York on November 2nd to discuss the work on transition from LIBOR to a new reference rate. And finally, to help inform the process, the Federal Reserve Board issued a request for information on the production of the new (repo-based) rates. We discuss each of these matters below. (If you could use a refresher on the LIBOR situation, click here.)
In the October 10th progress report, the FSB first observed that the administrators that publish the IBORs (including LIBOR) have taken important steps to strengthen and improve the resiliency of the benchmark rates. However, for some reference rates – and U.S. dollar LIBOR was highlighted – actual transactions remain scarce and the FSB warns that it’s challenging to ensure the integrity and robustness of these benchmarks when they are based primarily on “expert judgement” submissions. Second, the FSB notes that alternative reference rates, including SOFR for U.S. dollar LIBOR, have been identified in many jurisdictions. Third, ISDA has been working on improving contract robustness for swaps in the event of a permanent discontinuation of the IBORs. Fourth, ARRC efforts have extended to other markets like loans and CLOs.
On that last point, the ARRC Committee has reached out to U.S. loan and CLO market participants (including the LSTA) to participate in a business loans and CLO sub-committee. The initial industry emphasis has been to ensure that loan and CLO documentation has workable fallback language in case there is either a temporary disruption or permanent discontinuation of LIBOR. It is true that loans are more easily amended than other financial contracts. However, amendments requiring unanimous lender consent can be quite difficult to complete. Given that the current fallback language was designed for a temporary LIBOR discontinuation, one might want a more practical way forward to address the discontinuation of LIBOR on a permanent basis. This is why the industry is focusing today on streamlining any replacement mechanism.
There also is a focus on keeping market participants informed about what is likely to be a long process. To that end, ARRC is hosting a public Roundtable at the Federal Reserve Bank of New York on November 2, 2017. The event will provide a full picture of planning around a LIBOR transition and details on the paced transition plan. The LSTA is participating on a panel discussing how participants in loans, notes and securitizations are thinking about a LIBOR transition and how they are organizing themselves to protect against the risk that LIBOR could be discontinued. More information about the event is here.
While the fallback and education processes are going full-steam, so are efforts to get the new reference rates going. To this end, the Fed also issued a Request for Information to gather perspectives on the new repo reference rates – including SOFR – it is looking to gather and publish. The LSTA is preparing a letter discussing how a new rate could affect the U.S. syndicated loan market and why certain adjustments may be necessary.
While the transition to any new reference rate for loans and CLOs looks to be a multi-year slog, it is important work and the LSTA is committed to helping the market and market participants make the change. (If it happens.) For more information, please contact mcoffey@lsta.org or tvirmani@lsta.org.
