CLO Sales Pick Up The Pace With LIBOR Transition Ahead

Posted on November 5th, 2021 at 12:26 PM
CLO Sales Pick Up The Pace With LIBOR Transition Ahead

From the Desk of Jim Eccleston at Eccleston Law:

Industry experts anticipate that a record-setting pace of collateralized loan obligation (CLO) sales will continue as issuers prepare for an upcoming transition to a new benchmark. 

The London interbank offered rate must be discontinued by December 31, which likely will lead to heightened volatility in 2022 as CLOs seek new benchmarks. According to Barclays, some AAA investors and banks are informing managers that they prefer not to take a risk on LIBOR CLOs that may not close until January. CLOs often raise red flags from regulators and legislators as issuers seek to circumvent negative publicity regarding missed deadlines. 

Industry experts added that CLOs are not seeking to be the first to transition to new benchmarks unlike the Secured Overnight Financing Rate (SOFR). The inevitable transition may skyrocket CLO basis risk by creating a mismatch between the benchmarks utilized for assets and liabilities. Industry experts also predict that the shift from LIBOR may increase volatility for CLO values. Morgan Stanley recently announced that SOFR-linked loan issuance will continue throughout 2021, but investors should not anticipate any SOFR-linked CLOs until 2022. 

Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, regulatory and disciplinary matters.

Tags: eccleston, eccleston law, clo, libor, transition

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