NEW YORK, Dec 13 (LPC) - The loan market is split on how best to address current document language to prepare for the demise of a benchmark that trillions of dollars of investments rely on to set interest payments. More than 35 firms responded to a request from the Alternative Reference Rates Committee (ARRC) to give feedback for so-called fallback contract language for loans ahead of the end of Libor including Ares Management, JP Morgan and Wells Fargo, according to the responses, some anonymous, posted to the group’s website. In September ARRC asked for feedback on fallback language alternatives for floating-rating notes and syndicated business loans to identify the best way for existing contracts to move to a new benchmark if Libor is no longer viable. Libor, which is used to set rates on loans tied to corporate borrowings and mortgage payments, is expected to be phased out by the end of 2021. Andrew Bailey, chief executive officer of the UK’s Financial Conduct Authority, said last year that there were insufficient transactions underpinning the rates after Libor scandals emerged from the financial crisis. The Federal Reserve and the Federal Reserve Bank of New York set up the ARRC in 2014 to identify best practices for alternative rates following requests from the Financial Stability Oversight Council and Financial Stability Board. ARRC recommends shifting to the Secured Overnight Financing Rate (SOFR). In addition to requests for feedback on loans, earlier this month ARRC also asked for comments on Libor fallback contract language for securitizations, including Collateralized Loan Obligations, by February 5, 2019, according to a December 7 news release. “The fallback consultation is the first step toward the ARRC issuing standard recommended fallback language, which should reduce systemic risk and avoid a market dislocation if Libor were discontinued,” the Loan Syndications and Trading Association (LSTA) said in a September 24 note posted to its website. Respondents were split on the type of Libor fallback mechanism to use, with the trade group calculating 46% of respondents chose a so-called hardwired approach, 41% picked an amendment approach and 14% suggested both. Ares, JP Morgan and Golub Capital prefer the hardwired approach, which allows for a predetermined transition agreed to when the loan is originated, according to the letters, with Golub writing that it provides “upfront clarity.” It will allow “market participants to implement transition systems and processes that take into the account the menu of options,” the asset manager wrote in a November 26 letter. Capital One, and many of the anonymous respondents, prefer the amendment approach, which allows an agreement to be amended to replace Libor with an alternative benchmark. Spokespeople for the firms either declined to comment, did not return emails seeking comment or referred questions to the comment letters. “While a slight majority preferred the hardwired approach at this time as setting out a clear set of steps that would determine the successor rate to LIBOR, a significant number of responses saw also the amendment approach as more useful to their needs in the shorter-term,” Andrew Gray, co-chair of the ARRC’s outreach and communications work group, said in an emailed statement. “The amendment approach is an improvement over current language and recognizes the ability of borrowers and lenders to negotiate the terms of business loans, but respondents also noted the operational difficulties of negotiating a large number of loans in a short period of time.” ARRC said it will review the feedback for the consultations and in early 2019 release final recommendations. (Reporting by Kristen Haunss Editing by Michelle Sierra and Jon Methven)
The US loan market is split on the best way to develop standard language ahead of the release of LIBOR . ARRC received feedback from 35 firms on the fallback contract language for loans . Respondents were divided , with 46 % in favour of a change and 41 % preferring an amendment approach . The committee said it will review the feedback and release its final recommendations regarding standard language in early 2019 .