S&P Global Ratings Report: With A LIBOR Phase-Out Likely After 2021, How Will Structured Finance Ratings Be Affected?
As regulators and market participants alike signal their intent to phase out LIBOR and similar IBOR benchmarks after 2021, S&P Global Ratings took an initial look at what the effect may be on the many structured finance transactions tied to them.
"Although the path of transition to any new benchmark is uncertain and will be a steep challenge, we do not currently expect any rating impact on existing transactions," said Darrell Wheeler, managing director of global structured finance research.
In a new report published today, we conducted an initial review across structured finance transaction documents and found that current structured finance contractual IBOR language has a progression of fallback reference options, with the last resort usually to refer to the previous month's rate. None of this fallback language would be easily implemented, as there would likely be basis risk between existing references and a potential replacement, while borrowers, bondholders, and issuers would likely have different interests.
On the other hand, some products have no existing language for an IBOR alternative. Having rate transitions subject to majority of bond class approval or having no language at all creates the potential for dispute risk because structured finance bonds usually have multiclass bond structures, so it could be difficult to achieve a consensus in selecting a new benchmark.
Our criteria also have certain minimum standards for instruments linked to a variable index, which any proposed or new benchmark would have to meet.
"Ultimately, the impact on structured finance will depend on a number of factors, including whether current IBORs will be maintained for existing transactions until final maturity, whether existing transactions need to shift benchmarks, and whether there are enough mitigating factors to address a potential basis mismatch between assets and liabilities," Mr. Wheeler said.
Any transition will be challenging, as the market's exposure to floating base rates like LIBOR, TIBOR, HIBOR, and EURIBOR is significant. S&P Global Ratings tracks $2.3 trillion of original balance structured finance bonds that have IBOR exposure. These bonds also have significant underlying loan and derivative exposures that also reference IBOR.
The full report, "With A LIBOR Phase-Out Likely After 2021, How Will Structured Finance Ratings Be Affected?" was published on Oct. 19, 2017, on RatingsDirect at www.capitaliq.com.
The report is available to subscribers of RatingsDirect at www.capitaliq.com.