Milbank Structured Finance partner Sean Solis was recently quoted in a Bloomberg article titled “CLO Buyers Battle Over Libor Replacement for $570 Billion Market.” The article discusses the phasing out of the London Interbank Overnight Rate (Libor) over the next few years, which is pitting buyers of collaterized loan obligation (CLO) debt against equity buyers who are taking the most risk. Each group is attempting to protect profits in CLOs that are set to mature following the phase-out of Libor in 2022.
The spread between 1-month and 3-month Libor has put a strain on the profits of equity investors while benefiting debt investors, but a new benchmark such as the Federal Reserve’s Secured Overnight Financing Rate (SOFR) could dampen returns for debt investors. “Debt investors want to preserve that mismatch,” Mr. Solis commented. “The problem is, that asymmetry may change with a move to a new benchmark such as SOFR, and debt investors are fighting that.” The opposing sides have created a roadblock to the Libor replacement. Mr. Solis noted, “Even if SOFR is adopted, debt investors have been lobbying for a so-called modifier included in deal language in order to get higher payments.”
