Deborah Festa Quoted in Creditflux on CLOs and the LIBOR to SOFR Migration
For “CLO issuers sit on Sofr as they brace for short-term hit,” Creditflux quoted Akin Gump corporate partner Deborah Festa on topics in the U.S. collateralized loan obligation (CLO) market and the secured overnight financing rate (SOFR).
Festa noted on the topic of basis risk, “You could structure an interest rate ladder. This could take into account the proportion of a CLO’s portfolio that is pegged to Sofr and feed that through to the CLO liabilities, moving up or down as the proportion of Sofr-linked loans fluctuates.”
On the topic of transition from the LIBOR (London interbank offered rate) to SOFR, the article discusses CLO managers and the amount of control they will have over the transition. On the topic, Festa said that the majority of CLO documentation does give managers some discretion. She added, however, that, in recent months, CLO AAA investors have demanded managers switch over if trigger events take place.
Festa said, “There is a lot of variation in how CLOs will migrate to Sofr. Most CLO indentures point to a benchmark replacement waterfall and the focus is going to be on the point in that waterfall which either gives managers the option of switching their liabilities to Sofr when more than 50% of their portfolio collateral is benchmarked to Sofr, or forces them to make the switch under that event.”