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: News Flash- Borrowers Don’t Like Volatile, Credit Sensitive Rates

So far, much of the emphasis on LIBOR transition has been on lenders. As we all wait for alternative rates to hit the market, the Association for Financial Professionals, the National Association of Corporate Treasurers and the U.S. Chamber of Commerce joined in a letter to voice the concerns that borrowers have about the pace of the roll out to the Department of the Treasury, the Federal Reserve, the SEC and the CFTC.

This message isn’t surprising, but the letter contained another component that is worth highlighting. When asked if they prefer SOFR or “potential credit sensitive rates that could move up like LIBOR has done in times of economic stress”, roughly 85% of borrowers surveyed chose SOFR. Put that way, it’s surprising that even 15% of borrowers preferred credit sensitive rates.

Is this the death knell for credit sensitive rates like Ameribor and BSBY before they even get off the ground? Should borrowers really pick only SOFR? The answers are not as simple as they may seem. In our recent Alert, we discuss some of the considerations that borrowers, and lenders that are planning in earnest to offer credit sensitive alternative rates, should keep in mind.

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

LIBOR Transition: Regulator Comments- LIBOR is Dead, BSBY is in Trouble, and Ameribor Gets a Pass

Top regulators from the SEC, the OCC, the CFTC, the Federal Reserve and the Department of the Treasury spoke in unison at an eventful meeting of the Financial Stability Oversight Counsel on June 11, 2021.

Key takeaways:

(1) if you are a regulated bank that is delaying transition in hope that alternatives to SOFR will develop, the OCC is coming for you. The warning was expressed in more cordial terms than that, but no one wants to be unprepared when the OCC comes knocking.

(2) The chair of the SEC, who was also the co-chair of the IOSCO group that wrote the 2013 IOSCO principles by which replacement rate benchmarks are measured, doesn’t believe that Bloomberg’s BSBY rate meets the standard. This bluntly worded statement is at odds with the self-certification by Bloomberg, which was confirmed by an “assurance review” of an unnamed “global, independent accounting firm” in April. Awkward, to say the least.

(3) Although not mentioned by name, Ameribor appeared to get a pass, at least for now. Lenders and borrowers in non-capital markets are free to choose among rates that meet their needs, as long as it’s not BSBY. So are lenders and borrowers in the capital markets, as long as it’s SOFR.

The actual prepared statements are more engaging and provide useful insight. We take a deeper dive 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.

LIBOR Transition: Term SOFR Coming “Soon”

After the ARRC announced a week before the Memorial Day weekend that market participants can plan on a recommendation of CME Group as the administrator of a term SOFR reference rate “soon”,  it is a bit optimistic to expect that we would return from the holiday to a formal announcement on Term SOFR. Nonetheless, it is an encouraging development in what has been a rollercoaster ride on the fate of Term SOFR. In March of this year, it seemed as though Term SOFR might not come until 2022, with some dire predictions that it might not ever truly develop.

Exactly what “plans” market participants should make is still an open question. Based on developments earlier this year and the ARRC’s March announcement, some lenders are well on their way to originating daily SOFR loans even though they may have preferred to use Term SOFR. Term SOFR still is not here yet, and it remains to be seen what limitations regulators and the ARRC may put on it. In that regard, the ARRC’s key principle that Term SOFR should have a “limited scope of use” may cause some lenders to remain cautious. To hear company-side organizations, borrowers are all in favor of SOFR, including Term SOFR, if only they could find lenders willing to make SOFR loans at this point.

Our recent Alert explores some of the practical considerations surrounding the ARRC’s announcement.

 

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

New York Governor Signs the First LIBOR Transition Legislation into Law

On March 24, 2021, the New York Legislature passed Senate Bill 297B/Assembly Bill 164B, intended to reduce risks associated with the transition away from U.S. dollar (USD) LIBOR. The text of the legislation was initially presented by the ARRC last year. On April 6, 2021, New York Governor Andrew Cuomo signed the bill into law. The New York law has become the first legislative action relating to LIBOR transition and may serve as a model legislation for other states to follow.

While the UK Financial Conduct Authority, LIBOR’s regulator and administrator, confirmed that it would cease publication of representative USD LIBOR for the major USD LIBOR settings in mid-2023, which helps address a substantial portion of legacy contracts, there will be a significant number contracts that mature after mid-2023 and contracts that have no effective means to replace LIBOR upon its cessation. The New York legislation addresses those contracts without effective fallbacks that are governed by New York state law. It is expected to provide legal clarity for many New York financial products and agreements referencing USD LIBOR, reduce potential disputes surrounding the transition and lessen the burden on New York courts. Read on to see how our Alert, published today to learn more about the legislation!

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

LIBOR Transition: Hardwired Language Rewired

Last week was quite eventful in the world of LIBOR transition, from the ARRC’s SOFR Symposium, to the passage of LIBOR transition legislation in New York for tough legacy contracts, to the release of supplemental fallback language for syndicated and bilateral loans. The hardwired language has come a long way- the original version was barely used, but the update last summer has achieved broad adoption in new and amended loans. What does the latest iteration have to offer, and is it worth adopting at this point?

Compared to the various versions of amendment approach language that have evolved in the market, the hardwired approach offers parties more certainty as to what the replacement benchmark will look like. The details that remain tend to be more administrative in nature and are hopefully less prone to disputes. That said, the 2020 hardwired language is hardly simple or easy to understand. Many of the details, such as the end date for LIBOR, the availability of SOFR and the spread adjustment, remained unresolved when the language came out. This necessitated drafting in the alternative and using broad descriptive language to cover concepts that would develop in the future.

Fast forward eight months to the March 5, 2020 announcements of the FCA and the IBA, and clarity on those and certain other details is now here. Rather than saying that LIBOR will one day be phased out, the date is fixed. Although Term SOFR is still a question mark, daily simple SOFR is operational now, so there is no need for loan parties to fumble around trying to figure out what the replacement rate should be. The formal announcement of the end of LIBOR also set the market-agreed calculation of the SOFR spread adjustments, which Bloomberg dutifully computed the same day.

All of these are good changes to update in the hardwired language. The question remains whether they are worth adopting at this time. In concept, it is simple enough to update the template forms for new loans. However, it involves more effort, coordination and time than one might expect and introduces yet another variation in the loan portfolio. The backdrop for these changes is that by the end of 2021, and preferably sooner, all lenders should stop originating LIBOR loans, even with updated hardwired language, and only originate SOFR loans. Different lenders are at different stages of readiness for this task, with some ready to make SOFR loans in the coming weeks and months, and others likely to be pushing the New Year’s Eve deadline. It is a monumental task involving many departments at a bank and requires substantial drafting and thought.

To the extent that revising the hardwired language detracts from this effort, a lender might determine that the existing hardwired language is good enough for the remaining LIBOR loans that it will make this year. If a lender is switching to SOFR by mid-year, it may not be so many loans. The ARRC drafted the 2020 language to encompass the SOFR future, however that future might develop. The value of the updated ARRC language is that it takes the recent developments and shows market participants the practical effect those developments have on the SOFR future. This benefit can be obtained whether or not the updated language is actually implemented in any particular loan agreement.

 

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

LIBOR Transition: Legacy Loans on the Backburner

Now that the formal end dates for LIBOR have been announced by the FCA, it’s time to consider some of the practical implications  of the announcement. With the original end date scheduled for the end of 2021, many in the market breathed a collective sigh of relief at the possibility of an extension of the deadline. Among all the other complicated tasks to be completed before LIBOR’s demise, getting borrowers, many of which are oblivious to the  coming change, to amend the millions of legacy loans originated before the end of LIBOR was even contemplated is a particularly daunting one.

Although the 1-week and 2-month US dollar LIBOR tenors will still end on December 31, 2021, the 1-month, 3-month and 6-month LIBOR tenors used in the majority of loans will now end on June 30, 2023. By design, this extension has a number of effects. First, it reduces the number of legacy loans that will need to be amended to replace LIBOR, since some of those loans will expire by their terms during the additional time period. Second, it gives a lender more leverage to amend some of its loans. A borrower that wants to extend a loan that is expiring or that wants or needs an amendment or waiver during such time will not be able to just say no to a new interest rate. Third, for all legacy loans, it gives lenders more time to prepare for and explain to their borrowers the coming change.

Delaying the amendment of legacy loans is not entirely advantageous to lenders. Since lenders will not be permitted to originate new LIBOR loans after 2021, extending the wind down of LIBOR lengthens the period of time during which lenders will have to maintain and keep track of LIBOR and the replacement rates. Delaying amendment of legacy loans will also delay adoption of the new rates, which can hinder their success, for example in the development of Term SOFR.

Still, with all the other tasks that remain to be completed, it’s good to be able to put a major part of the work on the back burner to focus on getting replacement rates operational. Legacy loans are not completely out of mind—the LSTA should be coming out soon with sample forms of LIBOR transition amendments and notices for syndicated loans, which can be modified for other loans. Perhaps by the time comes for them to be used, the transition of legacy loans will not be such an insurmountable task.

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