LIBOR Transition: Drama Continues for BSBY

As Bloomberg and banks like Bank of America in the US and DBS Bank in Singapore continue to push forward with BSBY, IOSCO last month rattled its saber with a statement on credit sensitive rates, highlighting the importance of choosing alternative financial benchmarks that are compliant with the IOSCO Principles. The last volley in the continuing back and forth between regulators and proponents of new credit sensitive rates came in July, when Bloomberg tried to address some of the volume and manipulation concerns raised by SEC Chair Gary Gensler and others with BSBY.

The IOSCO statement counters that with a caution that IOSCO compliance is not a one-time test, and even if trading volumes are sufficient for current volumes of loans in such benchmarks, loan volume should not be permitted to grow if it outpaces increases in underlying trading volumes and are unable to be resilient. BSBY is not mentioned by name, but it has been the primary subject of attention.

Two weeks after IOSCO published its cautionary statement, Gensler spoke at the ARRC’s fifth session of The SOFR Symposium: The Final Year, responding to Bloomberg’s July report that it “could not address the main concern that the rate is built off of too thin a market.” Gensler reiterated that that he did not “believe BSBY is, as FSB urged, ‘especially robust,’” adding that, “I don’t believe it meets IOSCO’s 2013 standards.”

Unless regulators back up their words with actions, this drama is mostly noise, and lenders are free to continue to make BSBY loans. Whether they will be successful will depend in part on whether borrowers perceive BSBY as a better deal. For legacy LIBOR loans, the spread adjustment added to the interest rate to transition to SOFR has been set by market convention—about 11.5 basis points for a 1 month term, 26bps for 3 months and 43bps for 6 months. This adjustment reflects that LIBOR is an unsecured rate that is sensitive to fluctuations in credit risk while SOFR is a secured, relatively stable “risk free” rate. Since BSBY is also based on unsecured transactions, there should not be a need to add much, if any, spread adjustment to transition from LIBOR to BSBY. This lower spread could be attractive to borrowers if they believe that over time, the variable credit sensitivity of BSBY will not cause the rate to rise, relative to SOFR, more than the fixed SOFR spread adjustment.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: Derivatives News from CME Group

CME Group, the Term SOFR administrator, recently made a couple of important announcements. First, its Term SOFR data are now available for licensing for use in cash market financial products and OTC derivative products. Until now CME Group previously limited Term SOFR data to making loans. Their terms of use, which did not allow the data to be used for Term SOFR derivatives, have been updated with details on licensing.

Of equal importance, BSBY futures are live. As a complement to BSBY futures and SOFR-based offerings, CME Group also announced that it will launch Cleared BSBY swaps for both outright OIS and basis swaps beginning November 15, subject to regulatory review.

An active derivatives market is crucial to the development of Term SOFR and BSBY. With the availability of Term SOFR swaps, Term SOFR seems poised to replace LIBOR as the dominant rate in the loan market. As we discussed in our prior Alert, regulators, and SEC chair Gary Gensler in particular, have expressed considerable reservations with BSBY. It will be interesting to see how trading and loan volume in both rates develop.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: The first syndicated SOFR loan is here!

We knew it was coming, but it finally happened.

Ford Motor Co. announced in June their intention to refinance $15.4 billion in syndicated facilities — and at least some of them on SOFR. With all eyes on what would be the first syndicated U.S. corporate loan tied to regulators’ preferred LIBOR replacement, Ford formally launched the deal this month. Bloomberg reported that there are three revolver tranches that Ford is refinancing (with JPMorgan Chase & Co. leading the loan process): a $3.35 billion three-year portion, a $2 billion three-year tranche and a $10.05 billion five-year portion. Ford’s loan is using Simple SOFR, and not Term SOFR endorsed by the ARRC earlier this summer.

This first syndicated loan originated on SOFR has marked a milestone in the transition away from LIBOR. And as the transition gains steam, more SOFR loans are expected to come in the last quarter of the year.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: Term SOFR Formally Recommended… All Done?

On July 22, 2021, the Alternative Reference Rates Committee of the Federal Reserve Bank of New York (ARRC) followed up on its guidance from June and its confirmation on July 19 by formally recommending CME Group’s forward-looking SOFR term rates. After a roller coaster ride earlier this year, the messaging of the ARRC on Term SOFR settled down. Other than the mystery as to exactly when the announcement would be made, the statement was practically a nonevent. Proactive lenders that have been waiting patiently were quietly preparing their Term SOFR loan forms over the past few weeks. A flurry of new Term SOFR loans should not be far behind.

With this development, it might seem that the market has all the tools that it needs to transition to SOFR. Time for high-fives and a victory lap!

Not so fast. As those who have been living through the transition over the past few years can attest, there is always another issue to address. In this case, it’s interest rate swaps. Check out our recent Alert for a discussion on this issue.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: What’s a Borrower to Do?

So far, much of the focus has been on getting lenders to stop originating LIBOR loans in favor of loans based on alternative, risk-free rates. As we get closer to that becoming a reality on a broad scale, it’s worth taking a look at the issue from a borrower’s perspective. Borrowers have no say in the phaseout of LIBOR, but to varying degrees they will have a say in which alternative rates will become prevalent in the market.

To learn about what a borrower should do in light of the availability of alternative reference rates in the very near future, check out our Alert here.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: Release the CRITR?

It doesn’t sound quite as scary as the mythical monster from Scandinavian folklore, but it’s not intended to be. CRITR is not a complete game changer in LIBOR transition or trying to be one. What is it then?

The Credit Inclusive Term Rate (CRITR) and the spread only Credit Inclusive Term Spread (CRITS) are the latest products of IHS Markit, a $44 billion company that is set to merge with S&P Global later this year. IHS Markit initially developed CRITS to provide the market with an alternative credit sensitive spread over SOFR. When Term SOFR failed to materialize, it developed CRITR as a standalone credit sensitive rate with forward looking tenors similar to LIBOR.

In a crowded field with Ameribor and BSBY in addition to SOFR, and Term SOFR likely coming by the end of July, and regulators expressing concern about rates other than SOFR, and borrowers not too keen on credit sensitive rates, is there room for a new rate option?  Interest rates are a diverse, multi trillion dollar market, and even a small sliver of it can be lucrative if the rates take hold. Is it right for you? We discuss CRITR and CRITS in more detail in our recent Alert.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: Term SOFR Expected “Days” After July 26

June 8, 2021, was an eventful day in the LIBOR transition. That morning, the Interest Rate Benchmark Reform Subcommittee of the Market Risk Advisory Committee (MRAC) of the Commodity Futures Trading Commission (CFTC) announced its recommendation that starting July 26, 2021, interdealer brokers should replace trading of LIBOR linear swaps with trading of SOFR linear swaps. That same morning, the Alternative Reference Rates Committee of the New York Federal Reserve (ARRC) praised the MRAC recommendation and announced that once the switch occurs, it will be in a position to recommend CME SOFR term rates “very shortly thereafter.” June 8 also happened to be the date of the ARRC’s planned SOFR Symposium. Regulatory speakers at the symposium were confident that the July 26 date for the switch was realistic and achievable. ARRC Chair Tom Wipf clarified that he expects “very shortly thereafter” to mean “days, not weeks.”

It’s a stunning reversal in what otherwise appeared to be a dim future for Term SOFR just a few months ago. Read on our Alert, published today, to learn more about the recent developments relating to Term SOFR and its competing rates.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: BSBY Out of the Gates First

With all the regulator and market focus on SOFR as the LIBOR replacement of choice, it’s easy to forget that there are other replacement rates vying for market attention. We’ve written about Ameribor and highlighted some of the recent developments in its adoption. For the most part, support for Ameribor has come from smaller Main Street banks looking for a credit-sensitive rate that more closely matches the unsecured basis on which they borrow funds.

On October 15, 2020, Bloomberg threw its hat into the ring with its Bloomberg Short Term Bank Yield Index (BSBY). After a couple of months of publishing the rate on an indicative basis, Bloomberg launched the rate on January 20, 2021, and announced in early March that the rate is available for use as a replacement benchmark rate. Read on our recently published Alert to learn more about BSBY and recent developments relating to the rate.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

For LIBOR Transition Procrastinators, SOFR Starter Kit to the Rescue!

LIBOR is going away.  It was a distant pronouncement in 2017, and many thought it wouldn’t happen, or would get delayed.  But it’s coming.  Soon.  December 31, 2021 may still seem a long way off, but there’s a lot to do between now and then.  Market participants may be forgiven for concentrating on the global pandemic the last few months, but regulators in many arenas have stepped up their efforts in the past month to get the word out on LIBOR transition and get everyone moving forward on the right track.

Following its Summer Series on LIBOR transition, on August 7, 2020, the Alternative Reference Rates Committee of the New York Fed published the SOFR Starter Kit, a set of factsheets to inform the public about the transition away from USD LIBOR to SOFR. The SOFR Starter Kit is intended to ensure market readiness for the transition and help participants in markets using USD LIBOR to quickly familiarize themselves with the background information of, and main issues related to, the transition. The SOFR Starter Kit has three parts:

Continue reading “For LIBOR Transition Procrastinators, SOFR Starter Kit to the Rescue!”

Hardwired for a Smoother LIBOR Transition?

The London Interbank Offered Rate (LIBOR), which has served as a reference rate for approximately $350 trillion of debt and derivatives, will be phased out after December 31, 2021. In the United States, the Alternative Reference Rates Committee (ARRC), convened by the Federal Reserve Board and the New York Fed, has been tasked with ensuring a successful transition from USD LIBOR to a more robust reference rate. In June 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) as its recommended alternative to USD LIBOR. In April 2019, the ARRC first published recommended fallback language for syndicated business loans. At the time, the recommendations provided two approaches: an “amendment approach”―which delays all decisions about the successor rate and adjustment until a future date―and a “hardwired approach”―which hardwires the priority of replacement rates to be selected into the credit agreement upon origination based on what replacement rates are available at the time of replacement and provides for an easier amendment of related terms.

The syndicated lending market has largely adopted the amendment approach so far. In June 2020, however, the ARRC released refreshed recommendations regarding fallback language for U.S. dollar-denominated syndicated business loans that reference LIBOR. Unlike the April 2019 recommendations, the June 2020 recommendations provide only for hardwired fallback provisions. Read on to see how our Alert, published today, can help you discern the differences between the hardwired approach and the amendment approach and determine which works best for you.

Continue reading “Hardwired for a Smoother LIBOR Transition?”