Overview
- As part of surveillance of its ratings, S&P Global Ratings expects to receive timely notice of replacement interest rates and related changes to interest rate benchmarks in connection with the phase-out of U.S. dollar LIBOR in June 2023.
- Market participants are reminded that S&P Global Ratings is not a transaction party and therefore is not bound by any provision in a transaction document that requires rating agency confirmation (RAC) before a replacement benchmark is effective.
- We retain sole discretion in deciding whether to provide a RAC on any replacement benchmark. Even if a RAC is not requested or granted, we will consider the potential impact of the replacement benchmark on the rated transaction in the ordinary course of our surveillance activity.
- A "deemed RAC" (where, under a transaction document, a RAC is presumed given if a rating agency does not respond to a RAC request by a particular time) does not mean that once we complete our rating analysis, there will be no negative rating action arising from a replacement benchmark.
NEW YORK (S&P Global Ratings) Dec. 8, 2022--The Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR) administrator, announced in 2020 that it would not compel panel banks to submit dollar LIBOR rate quotes after June 2023. Many structured finance transaction parties did not contemplate the permanent cessation of LIBOR and, as such, did not incorporate robust fallbacks in their asset, liability, or hedging agreements. Evaluating the risks posed by this situation is more challenging for structured finance transactions than other transactions, because they often have both assets and liabilities indexed to LIBOR with different mechanisms to replace rates.
As part of our surveillance of rated transactions affected by the phase-out of LIBOR, we expect to receive replacement interest rate information on assets, liabilities, derivatives and other instruments in a timely manner. In some cases, transaction parties may execute contract amendments to replace LIBOR. In other cases, transactions (including underlying securitized assets tied to LIBOR) may fall within the scope of the Adjustable Interest Rate (LIBOR) Act of 2022, such that a Secured Overnight Financing Rate (SOFR)-based rate may replace LIBOR as the benchmark by operation of law or by determinations made by trustees or other determining persons. In all cases--whether transaction parties have executed amendments or benchmark rates have been changed pursuant to the Act--we expect to receive replacement interest rate information from issuers, trustees, or other key transaction parties.
Given the significant number of rated transactions that will be affected when LIBOR is phased out, S&P Global Ratings encourages transaction parties to inform us of potential changes to transactions as early as possible, particularly those changes related to interest rates on assets, liabilities, derivatives and other LIBOR exposures. As part of our surveillance of the transaction, we will consider the impact, if any, those changes may have on our outstanding ratings.
To the extent that transaction parties seek RAC for any amendments to interest rate benchmarks, our general approach to RACs are set out in "Standard & Poor's Clarifies Its Approach To Requests For Rating Agency Confirmation On Structured Finance Transactions," May 18, 2012. Since S&P Global Ratings is not a transaction party, we are not bound by provisions in transaction documents that require a RAC before certain actions occur (such as the effective date of a replacement benchmark). RAC provisions in transaction documents should not be interpreted to mean that S&P Global Ratings has agreed to provide a RAC or provide a RAC within the timeline prescribed by the transaction documents. We retain sole discretion in deciding whether to provide a RAC on any replacement benchmark or consider the impact of the replacement benchmark on the rated transaction in the ordinary course of our surveillance activity. "Deemed RACs" in transaction documents (where a RAC is presumed as given if a rating agency does not respond to a RAC request by a particular time) do not imply that S&P Global Ratings has considered the RAC request or that once its analysis is completed, no negative rating action will occur as a result of the proposed changes. Furthermore, we do not provide any comments regarding proposed changes in transaction documents and their potential rating impact in the absence of a RAC request.
Related Research
- U.S. Interest Rates In A Post-LIBOR World, Sept. 21, 2022
- European And Japanese Structured Finance Markets Approach LIBOR Cessation While U.S. Markets Prepare For A Major Shift, Nov. 2, 2021
- LIBOR Transition: Laws Won't Eliminate All Uncertainty, May 14, 2021
This report does not constitute a rating action.
Contacts: | John A Detweiler, CFA, New York + 1 (212) 438 7319; john.detweiler@spglobal.com |
Mark M Risi, New York + 1 (212) 438 2588; mark.risi@spglobal.com | |
Media Contact: | Jeff Sexton, New York + 1 (212) 438 3448; jeff.sexton@spglobal.com |
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