It’s a rule around here that I don’t write on the same topic twice in a row because if you don’t get bored, I will. I am making an exception this week to revisit last week’s blog about the industry’s failure to take on, or at least discuss, the considerable negative externalities of transferring our entire business from LIBOR to SOFR while we have time. The problem, of course, and I recommend last week’s commentary for a more fulsome discussion (or screed), is that we are barreling toward a world in which trillions of dollars of floating rate debt will be based on an index that is not credit-sensitive and which may (and likely will) cause a transfer of value from the providers of capital to the users of capital.
To my gentler readers, first an apology for this interregnum in publication. I’ve been sitting on this commentary like a hen on an egg for weeks. All I can say is having to work for a living gets in the way of writing about interesting stuff.
It’s now July and supposedly the transition from LIBOR to SOFR is almost already a done deal. Anyone notice that happening? Not to bury the lead but it hasn’t happened. Note that even the ARRC, between harrumphs about the slow take-up of SOFR products, has said that MAYBE they’ll let folks use Term SOFR soon (although they are still being a bit cagey on when and, perhaps more importantly, who will be given that privilege). That’s not good if we’re gonna base an entire floating rate marketplace on SOFR.
I have spoken to a number of people over the past months who have raised money or built technology to take advantage of a broadly anticipated distressed opportunity which was certainly to be occasioned by the pandemic. Did I miss it? Was I distracted by the First Family’s secret service chomping dog controversy or the upcoming UFO big reveal? Did it get by me when I simply wasn’t at my desk, making coffee? Continue Reading
Alongside co-sponsors ING and KBW/Stifel, next week Dechert is proud to be (virtually) hosting the 2021 Permanent & Private Capital Summit. This two-day conference, happening on June 2nd and 3rd, will cover the latest developments and trends in the private credit industry. You can view the full agenda now and register here for this can’t miss event!
Sharia law prohibits interest, naturally putting financial minds to work on how to build structures around this religious prohibition. But a recent ruling has found that such investment agreements do not qualify for safe harbor provisions of the bankruptcy code. Shmuel Vasser breaks down the 100 page long complex opinion concisely and clearly sharing with us the critical potential implications of this decision, as the case goes through the appellate process. Read all about it here: A Recent Ruling that Shari’a Compliant Investment Agreements Do Not Qualify for Safe Harbor Treatment May Have Broader Implications.
Here’s the headline which I don’t think has gotten the visibility it deserves:
LIBOR will largely end at the end of this year and not in the misty remove of June 2023.
We’ve written before about our anxiety regarding the fact that SOFR does not really seem fit for purpose to support commercial mortgage lending or indeed any cash product. (The nonsense about charging interest in arrears should have been a tell, to be honest.) Of course, the real problem is the absence of a credit-sensitive component to the new index, particularly in this time and place. That strikes me as almost fatal to the ambitions of the ARRC to remake the market in its image. SOFR is an open invitation for value transfer from lenders to borrowers at a time when inflation is closer than the horizon and an inexorable climb in the short end of the yield curve is most certainly on offer.
Here at Dechert, we have market-leading practices in CRE CLO as well as corporate CLOs, including broadly syndicated and middle market structures. So, every day that I peer into these two alternate universes, I’m astonished at how different these two fundamentally similar leverage technologies really are. Certainly, even at a modest remove, they look pretty much the same. A sponsor is looking for match term leverage and has developed a healthy disquietude about the mark to marketness of the repo market and has read CrunchedCredit assiduously and understands that portfolio lenders need multiple modalities of leverage. Said well-educated sponsor conveys financial assets into a securitization vehicle which issues time and ratings tranched debt to a wide range of investors seeking exposure to the space in a more liquid and more focused risk/yield return way. Tada!
Let me first apologize to my readership. I have been very dilatory in getting this commentary done and this topic is… a bit daunting. In my defense, working for a living can get in the way of thinking and writing. In any event, I have been doing some considerable reading about Environmental, Social and Governance (ESG) issues recently. It had not really been on my screen, in a big way, but has been bubbling along as a thing, important to some, but not so much for us denizens of the commercial real estate finance space. Continue Reading
Crunched Credit’s own Rick Jones spoke with the Mortgage Bankers Association about both the threats and opportunities facing the CMBS market as the global pandemic rages on. Covering everything from the Biden Administration, and what it means for regulation in the banking industry, to the “hot mess” that is the LIBOR transition, the interview discusses a host of relevant topics. For more, including Rick’s optimistic outlook for 2021 and beyond, be sure to read the entire interview here: The CMBS Market During the Pandemic: Q&A with Dechert’s Richard Jones.