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HPS plans SOFR as post-2021 Libor replacement in new CLO offering

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The list of securitization sponsors choosing the Libor “fallback” language recommended by a Federal Reserve-convened committee now includes a CLO manager, according to Covenant Review.

According to a report from the credit research firm Thursday, HPS Investment Partners is one of the first collateralized loan obligation managers to include contract language in its latest transaction that provides for the use of the Alternative Reference Rates Committee’s recommendations for replacing Libor as a benchmark rate of offered notes should Libor be discontinued after 2021.

ARRC this year finalized recommendations on replacing Libor with a forward-looking version of the Secured Overnight Finance Rate (SOFR), a new overnight benchmark that the New York Federal Reserve plans to develop into a term rate to be published by 2021. The ARRC also recommended steps on adopting the new rate, such as trigger events that would determine when and how the benchmark switchover should take place.

In HPS Loan Management 15-2019, HPS is among the first CLO managers to adopt the ARRC recommendations for securitization in CLOs. But it’s not the first issuer: both Ford Motor Credit and CarMax have added SOFR replacement language in recent securitizations.

The ARRC guidelines for replacing Libor also apply to other floating-rate debt instruments, including syndicated business loans.

By including fallback language in the initial offering, HPS and other securitization sponsors are taking a “hardwired” approach to a transitional rate that would make the change automatic upon the cessation of Libor, and not require noteholder consent at the time of the new-rate adoption.

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