Libor’s demise poses significant problems for outstanding floating-rate securities that are pegged to the benchmark.
Issuers can incorporate language in new deals that spells out the process for switching to a new benchmark. But existing deals may require an amendment that is approved by 100% of holders. And locating investors is no easy feat, since financial assets are held “in street name” by a brokerage firm, bank or dealer on behalf of a purchaser, obscuring their true ownership.
Faced with amending several hundreds of billions of dollars of outstanding asset-backed securities, the Structured Finance Industry Group has formed a task force to look at commissioning a better way of communicating with bondholders, and potentially among bondholders.
“There’s a desire as an industry to come up with a solution,” Kristi Leo, a member of SFIG’s operating committee, said at the trade group’s annual conference in Las Vegas Monday. “We’re going out to the marketplace to see if we can put it together.”
As daunting as the process would be, “the technology out there,” Leo said.
There is already an online registry of asset ownership and messaging platform, DealVector, that was designed to facilitate communication between issuers and their investors . The platform has been used by numerous of issuers of leveraged loans and collateralized loan obligations to refinance or amend deals. And two student loan servicers, Navient and Nelnet, have enlisted DealVector's help to extend the maturities of over $18 billion of bonds backed by federally guaranteed loans,
Scott Booher, Navient's assistant treasurer, is a member of SFIG's task force. He said that DealVector was helpful in getting the student loan deals amended but that there "is still a long way to go" to improve the process. "We had a lot of success that wasn't expected," he said at the same conference panel. "Folks gave us zero percent chance" of passing amendments, "but we did get north of $12 billion of bonds amended." However, that was "well short of what we would have liked," and and the amount of effort involved was "off the charts."
Even with DealVector's help, Navient had to employ a great amount of "manual" effort to reach investors and to encourage them to vote. It put out press releases, created pages on its website and held a "record setting" number of meetings at industry conferences. Tracking, monitoring and certifying amendments also required a great deal of effort, Booher said.
Facilitating communication with bondholders brings its own challenges. Leo noted that the SEC requires - and investors want - the ability to remain anonymous when they respond.
Another consideration, according to Paul Burke, a managing director and head of sales America issuer services at Citibank, is that "as soon as you have bondholders communicating with each other, you need issuer protection" from potential slander.
Figuring out who will pay for the technology is another hurdle, but Leo said that economies of scale will bring the cost down.
