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Weekly Wrap: Libor transition goes on even with SOFR term rate uncertain

The group steering a U.S. replacement for the beleaguered London interbank offered rate has said it can’t guarantee a vital last step in the process will happen this year as planned, spurring uncertainty about plans to wean the financial system off the world’s benchmark.

The Alternative Reference Rates Committee, a collection of public- and private-sector participants tasked with overseeing the Libor transition in the U.S., said this week that it can’t recommend a forward-looking term rate for the Secured Overnight Financing Rate by mid-2021, and it can’t guarantee one even by year-end because of insufficient liquidity in derivatives tied to SOFR.

The creation of a SOFR rate that extends beyond overnight has long been considered by market participants as a chicken-and-egg problem. End users don’t want to trade products tied to SOFR because of the low volume, yet liquidity is needed to create the term rates people have been craving.

The ARRC estimates that open interest in short-dated SOFR swaps total just 5.8% of Libor and 7% of fed fund swaps in the 0 to three-month maturity bucket. SOFR futures contracts have 67% of the open interest of Libor-based futures and 45.5% of fed funds.

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Priya Misra, the head of U.S. rates strategy at TD Securities, sees the ARRC’s lack of term SOFR as a “virtuous cycle.” Because the regulators have instructed institutions to stop issuing new Libor contracts after 2021, she said banks will use SOFR, which should create a need to hedge, spurring derivatives trading. That should in turn help build liquidity and bring more “non-SOFR players” into the market just to hedge interest rates.

“They sort of feed off each other,” Misra said. “Maybe it’s an optimistic view but in my mind term SOFR creates the chicken and the egg.”

Bloomberg

The committee and regulators have reiterated time and again about not waiting for a term rate and utilizing the existing tools available, such as SOFR averages and index data.

Tom Wipf, chair of the ARRC and vice chairman of institutional securities at Morgan Stanley, said at the group’s symposium Monday they’ve been “very clear not to wait for a term rate” and “very clear about limited scope of use.” He also expressed concern for market participants that are waiting for a term rate for scenarios that were never discussed.

Trade finance
In this case, the ARRC’s acknowledgment that a term rate may not be possible this year is frustrating for a small, but significant, group of players that had been expecting such a development, according to ING strategist Padhraic Garvey. These tend to be borrowers in the trade finance and working capital space, who use term rates to manage their liquidity, he wrote in a note to clients.

“There is merit in such frustration,” Garvey said. “The fact that the ARRC had sent out requests for proposal for parties to come back with suitable term SOFR compilations had led most to believe that a term rate would be available.”

Strategists at JPMorgan Chase & Co. agree.

ARRC’s unwillingness to move forward will be disappointing to those who prefer an outright term rate or that “went along with the transition, believing that there would ultimately be a near-risk-free analog to one- or three-month Libor,” according to a note by strategists led by Teresa Ho and Alex Roever.

Still, the priority has been to ensure the successful launch of the original SOFR, and to date, “it’s been largely successful,” they added.

Bloomberg

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Distressed debt creeps lower

The amount of traded distressed bonds and loans fell to about $93 billion as of March 19 – down 1.6% week-on-week. The amount of troubled bonds slid 0.5% while distressed loans dropped 4.6%.

There were 267 distressed bonds from 139 issuers trading as of Monday, according to Trace data. That’s up from the prior week’s 257 bonds from 133 issuers, but far below the 1,896 troubled bonds at the March 23 peak.

Diamond Sports Group LLC had the most distressed debt of issuers that hadn’t filed for bankruptcy as of March 19, Bloomberg data show.

Bloomberg

Antares prices largest-ever CLO reset

In what market observers say is the largest broadly syndicated CLO reset of the post-crisis era, Antares Capital Advisors has closed on new terms for Antares CLO 2017-1 including an upsizing to $2.3 billion.

The new AAA spread on the deal, which priced at par is 159 basis points over three-month Libor. The senior tranche (totaling $1.32 billion) has a 5.36-year weighted average life on the tranche.

According to a company release, the deal was upsized to from $2.1 billion from investor demand among banks, insurance companies and asset managers.

The deal brings total the Antares Capital subisidiary's assets under management to $7.7 billion.
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Yellen balks at calling asset managers systemically risky

Treasury Secretary Janet Yellen appeared reluctant Wednesday to use her authority as the chair of the Financial Stability Oversight Council to designate individual asset managers as systemically risky, favoring designations for asset management activities instead.

Speaking before the Senate Banking Committee, Yellen said she intended to use the FSOC to investigate systemic risks in the asset management industry and among asset managers. But she highlighted that the council has examined the risks posed by asset managers under previous administrations, and those inquiries were aimed at specific activities. She said the council will likely take a similar approach in this administration.

"I think with respect to the risk of asset management, rather than focus on the designation of companies, I think it’s important to focus on activity and to consider what the appropriate restrictions are," Yellen said. "It’s not obvious to me that designation is the correct tool.”

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Neil Haggerty
Tesla Model 3
Patrick T. Fallon/Bloomberg

Tesla launches largest-ever lease ABS on heels of first profitable year

The $1.18 billion Tesla Auto Lease Trust 2021-A, baked by lease contracts originated by the Tesla Finance captive arm of Tesla Inc., bests a $940 million Tesla ABS that was issued in 2019 with the inclusion of 24,702 contracts.

The deal is also the first to include Tesla’s mid-range Model Y vehicle (with an MSRP of $54, 119) that makes up 36% of the securitized value of the TALT 2021-A pool, according to a presale report from Moody’s Investors Service.

Tesla is marketing seven classes of notes, including four senior note tranches with credit enhancement support of 29.75%, via Credit Suisse Securities.

Three of the senior-term notes due March 2025 carry preliminary Aaa ratings from Moody’s, while a $113 million money-market tranche bears Moody’s highest short-term rating of P-1.

The largest tranche is the Class A2 notes offering totaling $380 million.

Moody’s expected net credit loss on the deal is 0.5%, unchanged from Tesla’s previous deal issued in August 2020.

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