Transition Away from Libor? Pfft. Piece of Cake
There’s a lot of talk about transitioning away from Libor but the how-tos are in short supply.
For this Friday, some familiar phrases: Easier said than done. Talk is cheap. Easy for you to say. These are likely the thoughts of current holders of debt pegged to Libor, when told they need to “transition away” from the scandalized reference rate to the more reliable Secured Overnight Financing Rate (SOFR) from the Fed or the Sterling Overnight Index Average (Sonia) from the UK. “How about you ‘transition away,’ Mr. Regulator??!!” they might also think. Those regulators are saying Libor will end by 2021.
The problem is Libor is deeply entrenched, both in institutional and retail loans. According to Bloomberg, there are $170 trillion of swap contracts alone still tied to Libor rate. Then there are the mortgage-backed securities that involve quite a few more trillions. The contracts for these MBS do provide a “fallback” clause if Libor is temporarily unavailable. But there’s probably nothing about the end of Libor, experts say. So it leaves a lot of haziness when it comes to the legal aspects, and some reports suggest issuers of MBS could be tangled up in years of litigation following the 2021 cutoff.
And it’s all the technical and legal stuff that is leading to lethargy on the part of those who should be transitioning away. They know about Libor and SOFR and Sonia and 2021. But they’re just not doing much about it yet. According to Financial Conduct Authority head Andrew Bailey, it’s a challenge. “The biggest obstacle to a smooth transition is inertia [and] hopes that Libor will continue,” he said, according to Bloomberg.
His claim is backed up by recent survey data from the International Swaps and Derivatives Association as well as from informal NeuGroup discussions. ISDA, along with a handful of other major US and European trade associations, released results of their long anticipated “IBOR Global Benchmark Transition Report” in late June. The survey indicates respondents are gearing up for the transition, given 76% have at least started internal discussions about it. However, only 11% of respondents have allocated budget to the initiative and 12% have developed a preliminary project plan, while nearly a quarter of respondents have yet to initiate a program to support the transition. This is the case, the report’s authors note, despite survey participants saying they may have been more aware of the transition to risk-free rates more than the market as a whole, given its “core” consisted of trade association members, and 30% are members of RFR working groups.
NeuGroup members’ responses to queries by Bloomberg executives leading a session on the issue at a late May meeting suggested most corporates fall in the quartile that has yet to initiate a program. Half of the 20 corporate attendees acknowledged that their companies held debt or derivatives maturing past 2021, but none mentioned any definitive plans to prepare for the transition. Read more about it here.
Meanwhile, the scope of the Committee on Foreign Investment in the United States or CFIUS, which weighs in on whether a transaction is kosher for national security purposes, is creeping outward. The Gerald Ford-created agency has been very active in the last 18 months or more, examining, kyboshing, holding up and occasionally approving foreign purchases of US assets. It stopped China's Ant Financial's attempt to acquire Moneygram, prevented a Chinese investment firm from buying US semiconductor company Lattice, and more recently, aided in President Trump’s decision to block Broadcomm’s attempt at a hostile takeover of US chipmaker Qualcomm. The message here? Be very careful. As a tool, it seems to fit president Trump’s hands very well, to the extent that any transaction, no matter how seemingly unrelated to national security, is subject to review by CFIUS. Less understood is that even minority investments by foreign investors can result in the US company itself being classified as a “foreign person,” subjecting it to CFIUS review as if it were a foreign firm.
“That means that future investments or acquisitions by the American company, of US businesses will be subject to CFIUS review, just as if the American company were a Chinese, or German or Canadian firm,” according to a report recently published by Pillsbury Winthrop Shaw Pittman LLP. Read more about it here.
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