Consent challenges
Transactions losing value without Libor fallback language
Investors are working with an asset registry and communication platform to obtain noteholder consent in order to insert Libor fallback language in certain securitisations, ahead of the 2021 deadline. This is driven by concerns that transactions without fallback language are losing value compared to newer deals with the necessary language to transition to a new reference rate.
DealVector has been mandated by investors to try and get support for an amendment to include Libor fallback language for the Navient securitisations, SLCLT 2007-1 and CEDLT 2007-A prior to 2021. The firm has experience in this field having worked to obtain noteholder consent on US$30bn of Navient and Nelnet bonds with regard to the legal final maturity issue in 2016-2017.
Jim Kranz, vice president, business development at DealVector, says that the task involves working on six tranches and the firm has obtained 100% consent on three so far, but is confident on the outlook for the other three. He says: “With regard to the Navient transactions, we were approached by an investor, which is concerned that those deals may lose value if not amended to include LIBOR fallback language. In fact the investor said that new issue student loan ABS with fallback language included is trading 5bp tighter.”
Additionally, Kranz says that his firm has been mandated for other deals: “We also have a mandate to include Libor fallback language in a series of TruPS CDOs. This is a much bigger task as the collateral issued by the banks also needs to be amended. Thus we will be contacting the banks to get consent from them and then shepherd the consents through the Trustee DTC system to gain the bondholders’ consent. It is a big challenge and probably more time consuming than student loan ABS.”
With regard to whether the 2021 deadline is likely to be met for all securitisations, Dave Jefferds, co-founder and ceo at DealVector, thinks that, as a result of the complexity in ABS, many deals will have difficulty meeting the deadline. He adds that those with the most difficulty are the older vintages issued before the Libor scandal that haven’t got fallback language built in, or don’t have the ability to easily refinance before 2021.
He adds that CLOs are “are a bit of a different animal because, post-Volcker, many have already adopted refinance mechanisms that may make it easier to adopt necessary fallback language. This should ease the transition for CLOs, to an extent.”
He says, too, that the amendment process is generally harder for ABS than certain vanilla asset classes “like corporate bonds, because the trust often has to get approval from the entire capital structure all in one go. So senior, mezz, and junior investors all must get on the same page, and this may complicate the process. ”
Kranz points out that not just investors, but issuers too, can come to the firm for assistance and that it has the systems and processes in place to alert custodians as soon as consent is “on the way” and to highlight relevant information needed to set up the consent. Additionally, Kranz says the firm has tabulation tools to ensure all consents are accounted for and “do not get lost in the process.”
In terms of whether the transition to a new reference rate will continue to be investor led, Kranz thinks so, although it might differ depending on the asset class. He concludes: “Student loan issuers have been proactive to date, thus the SLABS sector could be an easier one to solve – the community is a bit more tightknit and successfully navigated the legal final maturity issue. We have a huge database of SLABS investors and can therefore get in touch with the bondholders to gain necessary consent for insertion of Libor fallback language.”
The current investor lead mandate for SLCLT 2007-1 and CEDLT 2007-A can be found at my.dealvector.com/ilink/Libor_Fallback while a generic Libor legacy registration hub can be found at www.liborhub.com.
This article was published on 16 August 2019.
