Tuesday, April 9, 2019

Transcription

1 Prepare, Don t Panic For the Move Away From LIBOR Moderator: Panelists: Ellen Hefferan, EVP, Operations and Accounting LSTA John Drummey, Vice President, State Street Global Services Nina Guinchard, Director, head of the Transaction Coordination Group, Deutsche Bank Paul Marchetti, Senior Principal Product Manager, Finastra David Watson, MD, Wholesale Lending Services Commercial Banking, JPMorgan Chase Tuesday, April 9, 2019

2 AUDIENCE POLLING QUESTION How knowledgeable do you feel you are on the LIBOR transition? Very knowledgeable Somewhat knowledgeable Not knowledgeable at all 2

3 If There is No Term SOFR, What Should Second Option Be? SOFR Rate Compounded in Advance. This rate would be determined by compounding the equivalent number of days for the previous time period. For instance, if a borrower wanted a 30-day SOFR contract, it would use the rate calculated by compounding overnight SOFR for the previous 30 days. The positive is that this rate is known in advance and would be operationalized very quickly like term SOFR. The negative is that, for longer contract periods, it could be stale. SOFR Compounded in Arrears. This rate is determined by compounding SOFR during the interest period. If a borrower wanted a 30-day SOFR loan, the system would compound every day for those 30 days to determine the rate at the end. The positives are that this is the true, exact interest rate on the loan, it s what most other asset classes are using and it is perfectly hedgeable with swaps. The main negatives are that the final compounded rate is not precisely known at the beginning of the interest period and that it is complex to operationalize.** Simple Daily SOFR in Arrears. This rate is pulled daily, but it is not compounded. The positives are that this rate is basically the exact rate of interest, it is close to being perfectly hedgeable and loan systems already can do this with daily LIBOR and Prime, so the operational build is modest. The negative is that the exact rate will not be known until the end of the interest period.** ** These two options would have a lookback or lockout period 3

4 Implementation of SOFR Forward Looking Term SOFR known at the beginning of the period Cost of funds Hedge ability Commercial Technology Process Referencing new rate Similar functionality to current LIBOR accrual Potential change in interest periods SOFR Compounded in Advance known at the beginning of the period Cost of funds Hedge ability Referencing new rate Similar functionality to current LIBOR accrual Potential change in interest periods SOFR Compounded in Arrears not known at the beginning of the period Significant change Accrual Cash flow changes Cost of funds impact Most hedge able / aligns with current derivatives conventions Significant change Referencing new rate Accrual calculations Compounding period / lockout / look back Primary / secondary delayed compensation Changes to risk / finance models Significant change Documentation changes Closing / servicing process moving from forward to backward looking process Finance process Increase in communications and notifications amongst loan parties Invoicing the Borrower Daily Simple SOFR in Arrears not known at the beginning of the period Cost of funds Referencing new rate lockout / look back Primary / secondary delayed compensation Similar functionality to current PRIME / ABR accrual Moderate change Documentation changes Closing / servicing process moving from forward to backward looking process Interest payment dates Increase in communications and notifications amongst loan parties Invoicing the Borrower 4

5 AUDIENCE POLLING QUESTION Of the three alternative options, what would be the preferred second fall back rate option? SOFR Compounded in Arrears SOFR Compounded in Advance Daily Simple SOFR in Arrears 5

6 AUDIENCE POLLING QUESTION Of the three alternative options, what would be the preferred second fall back rate option? Very Somewhat Not at all I don t know what the business side is thinking 6

7 Considerations For Compounded SOFR in Arrears, what is compounded? o Just SOFR o SOFR + Spread Adjustment or o SOFR + Spread Adjustment + Margin What will Spread Adjustments look like? 7

8 Publication of Rates - What and When? What? o SOFR o Credit Spread adjustment or o SOFR + Credit Spread Adjustment o Daily, 30, 60, 90 day interest periods When? o Today Daily SOFR is quoted by the NY Fed at 8:00 am for the prior s day activity NOTE: to operationalize SOFR, rates and spread adjustments must be easily accessible and capable of being automatically consumed by loan market systems. 8

9 Conventions For all SOFRs, how do we deal with the rate being a day old? o Look Back vs. Lockout periods What is the affect on lender communications and notifications with a daily rate quote? How much notice does a Borrower need with respect to a principal/interest payment? How will the market handle prepayments and calculating the payoff amount? Does transitioning from LIBOR affect a delayed compensation calculation? What does one need to calculate daily accruals and NAVs? Is there a change in how a lender will reconcile to the Agent Bank s records? 9

10 AUDIENCE POLLING QUESTION How prepared is your bank for the transition away from LIBOR? Very prepared Somewhat prepared Not prepared Don t know 10