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: 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.

Is There Room for AMERIBOR in a SOFR Future?

With the phase out of LIBOR just over a year away and the ARRC having identified the Secured Overnight Financing Rate (SOFR) as its preferred replacement for US dollar loans, it appears that the market has the guidance it needs to make the transition.

Not so fast, say some Main Street banks.  SOFR may work for much of the loan market and particularly larger banks that can borrow on a secured basis. However, this does not represent the reality for many smaller and regional banks, which often can borrow only on an unsecured basis. Using SOFR can lead to a mismatch between the borrowing risk that such banks take and the interest they can earn on their loans.

What are such banks to do?  Some of them have voiced their support for an alternative LIBOR replacement rate―the American Interbank Offered Rate (AMERIBOR).

Continue reading “Is There Room for AMERIBOR in a SOFR Future?”