CLO Libor fallback language proposal fails as investor balks at change

NEW YORK, October 8 (LPC) - An investor has kept a US Collateralized Loan Obligation (CLO) from fully adopting Libor fallback language, ahead of the demise of the benchmark in 2021.

American Money Management Corp (AMMC), a unit of American Financial Group, had asked all debt investors in its AMMC CLO 19 to agree to new Libor fallback language as part of a recent refinancing of the vehicle’s three most senior tranches.

MUFG, the bank arranging the CLO refinancing, sent a note to investors Monday saying that due to a holder that did not consent to a change to Libor language, the fallback language will only apply to the Class A, B and C notes as part of their refinancing, according to a source.

The bank said it plans to add “springing” Libor replacement language to the D and E tranches -- the two most junior debt slices that were not reworked -- which would allow for Libor replacement language to become effective at a later date, in case the non-consenting holder changes its mind or sells the note, the source said.

Investors may agree to add Libor fallback language if they think it may make the CLO tranche easier to sell in the future, while other investors may not want to approve new benchmark language unless they are paid a fee.

An MUFG spokesperson declined to comment. An American Financial Group spokesperson did not return a call seeking comment.

Markets have been debating a move from Libor since Andrew Bailey, chief executive officer of the UK’s Financial Conduct Authority, in 2017 said Libor needed to be phased out by the end of 2021. Participants in both the US$1.2trn US leveraged loan market and the US$641bn US CLO market have been considering the best way to transition away from Libor to ensure their positions are not altered by a change in rate.

The Federal Reserve-backed Alternative Reference Rates Committee (ARRC) in May released recommended securitization fallback language that predetermines the transition away from Libor, known as a ‘hardwired approach.’ The group recommends a move to the Secured Overnight Financing Rate (SOFR), a broad measure of the cost of borrowing cash overnight collateralized by US Treasury securities.