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The Libor/SOFR spread differential poses challenge for CLOs
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Term SOFR & Related Loan Conventions
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Libor Replacements Multiply in Shift That Could Fracture Markets Nowhere is the race to succeed Libor more up in the air than in the multitrillion-dollar syndicated lending markets. Bloomberg | May 24, 2021
(Bloomberg) A slew of newer and lesser known reference rates are staking their claim to a share of the post-Libor landscape as the outlook for the space grows increasingly fractured.
Once largely considered afterthoughts in the race to replace the London interbank offered rate, a clutch of upstart challengers, from Ameribor and BSBY to ICE’s Bank Yield Index, have been gaining traction, or at least garnering more attention, in recent weeks. Their ascent comes as borrowers and bankers increasingly question whether the Federal Reserve’s long-preferred replacement, the Secured Overnight Financing Rate, is the best option for the multitude of markets that must ditch scandal-tainted Libor by year-end.
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By John Hintze
In March 2021, the administrator of the London Interbank Offered Rate made it official: certain tenors of U.S. dollar Libor would cease to publish on Dec. 31, 2021, with remaining settings terminating on June 30, 2023, for legacy transactions. With the long-telegraphed Libor endgame now set in stone, banks are picking up the pace of transition amid front- and back-end challenges.
One concern held by community, midsize and regional banks that use Libor is that the Secured Overnight Financing Rate, the favored alternative of the Alternative Reference Rate Committee, a public-private group convened by the New York Fed, is that it does not reflect credit risk. In times of market stress, investors flocking to the risk-free rate would cause it to plummet, along with the banks’ returns on SOFR-priced loans, while their cost of funds jumps a bank nightmare.