NEW YORK, Feb 20 (LPC) - Participants in the US$585bn US Collateralized Loan Obligation (CLO) market say a transition to a new benchmark should happen sooner than later as the phase-out of a rate used to set payments on trillions of investments is just two years away.
Ares Management, Credit Suisse, PGIM and Golub Capital were among the more than 15 firms that responded to a request from the Alternative Reference Rates Committee (ARRC) to give feedback on so-called fallback contract language for securitizations including CLOs. A number of respondents said they would like the ability to transfer to an alternative rate sooner than the proposed 30 days before the discontinuation of Libor, referred to as the cessation date.
“The ability to transition to an alternative base rate prior to a cessation date would be beneficial to the CLO market,” Golub wrote in its comment letter.
In December, ARRC asked for feedback to ensure contracts for securitizations and bilateral loans will continue to be effective if Libor is no longer available. The group previously solicited comments on fallback language for syndicated loan documents.
Libor, which is used to set rates on loans tied to corporate borrowings and mortgage payments, is expected to be phased out by the end of 2021 following a 2017 call from Andrew Bailey, chief executive officer of the UK’s Financial Conduct Authority, who said there were insufficient transactions underpinning the rates. CLOs, the largest buyers of leveraged loans, pay investors in their debt tranches a set rate plus Libor.
The Federal Reserve (Fed) and the Federal Reserve Bank of New York set up the ARRC in 2014 to identify best practices for alternative rates following requests from the Financial Stability Oversight Council and Financial Stability Board. ARRC recommends shifting to the Secured Overnight Financing Rate (SOFR).
“The risks associated with Libor publication ceasing or changing are clear, so it is critical that we continue to prepare for this eventuality,” Sandie O’Connor, chair of the ARRC and JP Morgan chief regulatory affairs officer, said in a December 7 news release soliciting the feedback. O’Connor is set to retire from JP Morgan April 1.
In its comment letter, Ares recommended extending the time frame to 90 days to coincide with quarterly CLO payments.
Golub also said a longer time frame may be more appropriate, noting its “over-arching goal” is to “ensure that the market adopts CLO Libor fallback provisions that work nearly seamlessly with syndicated Libor fallback provisions.”
Spokespeople and representatives for the firms either declined to comment or did not respond to a request for comment.
“None of these consultations are as of yet final, and they only relate to consultations moving from current Libor to a new world where there is no Libor,” said Adam Schneider, a partner at consulting firm Oliver Wyman.
Reporting by Kristen Haunss. Editing by Michelle Sierra and Jon Methven