Libor-No-More?

CLO market participants are once again finding themselves scrambling, this time to consider alternatives to the high probability of a financial industry without LIBOR. This follows comments made by the head of the UK Financial Conduct Authority on July 27, 2017, indicating that LIBOR in its current form will be phased out as a benchmark rate and a substitute must be in place by the end of 2021.

In an industry that is still coming to terms with the Loan Syndication & Trading Association's (LSTA) win over federal regulators exempting U.S. CLO managers from adhering to risk retention requirements, it is believed that the potential elimination of Libor could increase the volatility of the well-established benchmark rate and pricing of the underlying collateral obligations. This could reduce the ability of collateral managers to hedge interest rate risks, as well as negatively impact the liquidity of the secured notes.