The LIBOR transition may have been extended, but it's not going away. U.S. regulators have indicated that banks should stop using LIBOR in new issue contracts by December 2021. This means the leveraged loan and collateralized loan obligation (CLO) markets are expected to see significant changes in interest rates during 2021 as borrowers and lenders come to terms with new risk free rates, such as SOFR, together with spread adjustments, floor considerations, and related changes.
Legacy CLO transactions should have additional time to make the shift toward new rates based on the recent announcement from the Financial Conduct Authority that most dollar LIBOR settings will cease after June 2023. At year-end 2020, S&P Global Ratings had about 870 rated U.S. CLOs from 140 managers outstanding, with origination dates ranging from 2006 through Dec. 30, 2020. Within these CLO indentures, there are a variety of document provisions related to how a potential LIBOR transition should be handled.
We reviewed CLO indentures to assess the LIBOR fallback language governing a transaction's liabilities. We decided to bucket the different types of provisions into five categories that would allow us to compare CLOs to each other and to other structured finance asset classes (see "As The Deadline For The Transition From LIBOR Approaches, Work Remains For U.S. Structured Finance," published Oct. 6, 2020). To categorize CLOs by vintage, we used the latest of the CLO's initial closing date or most recent reset/refinancing date, since LIBOR provisions are often updated when these occur. A large majority of our rated CLO transactions closed between 2018 and 2020 (667 deals, or 76% of our rated U.S. CLO universe).
At a high level, we observed the following from our review and note a significant CLO vintage bias:
- Alternative Reference Rates Committee (ARRC)-like fallback language can be found in 26% of the overall transactions, including 76% of the transactions that closed in 2020.
- On the other end of the spectrum, there is a smaller number of U.S. CLOs (roughly 130 of our rated deals, by our count) that could theoretically become fixed-rate obligations post-transition; we expect this number to decline significantly in 2021 as large numbers of existing CLOs reset or refinance and update their LIBOR transition language.
- In between the two opposites above, there are CLOs where the manager has the flexibility to select a replacement rate post-transition, with restrictions around what the new base rate can be. This concept was introduced in 2018 after the announcement of the LIBOR transition but before the ARRC-recommended language was developed, and most of the CLOs with this language in their documents were originated in either 2018 or 2019.
- Finally, we see a handful of other approaches, including some relatively recent transactions with weaker replacement language. This can occur when a transaction is partially refinanced without amending the LIBOR fallback language for all LIBOR-linked liabilities.
This report does not constitute a rating action.
|Primary Credit Analysts:||Yann Marty, Paris + 1 (212) 438 3601;|
|John A Detweiler, CFA, New York + 1 (212) 438 7319;|
|Stephen A Anderberg, New York + (212) 438-8991;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.