Considerations for LIBOR Alternatives in Loan Documentation Last updated: January 25, 2018 Introduction On July 27, 2017, the U.K.’s Financial Conduct Authority (FCA) announced that banks would no longer be compelled by the FCA to support LIBOR past the end of 2021. The administrator for the LIBOR Benchmark, ICE Benchmarks Administration (ICE), has said they will continue to publish LIBOR after 2021. However, regulators have signaled that continued reliance on LIBOR could present a systemic risk. According to the regulators, this systemic risk exists because LIBOR continues to suffer from a lack of real transactions underpinning it and, beginning in 2022, many banks may drop out of the LIBOR submission pool, further undermining LIBOR as a benchmark. The threat of banks exiting after December 31, 2021 means that regulators will likely continue to push market participants, particularly large banks, to…

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Negative Interest Rates: How should I prepare? May 2016 Why are negative rates now an issue? Of course, the concern for negative rates did not develop in a vacuum. After all, negative rates are a current reality in several developed economies and many market participants in the US were already forecasting a much less sanguine trajectory for Fed Funds than the Committee publishes in their quarterly staff projections. The market projections, as derived from traded levels on interest rate swaps tied to the effective Fed Funds rate, when contrasted to the Fed’s “dot plot” showed a nearly 2% gap between where the market expected Fed Funds to be at the end of 2018 and the Fed’s median projection. The downside risks to the economy reflected by these market based pricing measures, which by their nature are intrinsically probability-weighted in the…

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Negative LIBOR Strategy Chatham Financial White Papers – May 2016 Negative USD LIBOR!?: A Brief Background It was hard not to imagine Sisyphus’ allegorical rock rolling back down the hill when the topic of negative interest rates in the U.S. went viral in February. This, only a few short weeks after the Fed carefully raised their target range for the policy rate following years at the zero lower bound and simultaneously guided the markets to expect a smooth ride to a cruising altitude of 3% for the funds rate. Those of us who had forecast (or hoped) for the frequency of our use of the terms “inevitable, unprecedented, and unconventional” to decline to their pre-crisis levels were disappointed by a more volatile reality, yet again. But as we lay out the relatively rapid rise, and subsequent rationalization, of the market’s…

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It’s that time of year when Americans from coast to coast start trembling with fear as they approach Thanksgiving dinner – and not just because of Aunt Ethel’s pumpkin kale casserole. This dinner table has regrettably become the annual moment most associated with awkward conversations, as everyone’s political, parenting, and pecuniary choices come under the microscope. “I cannot believe you voted for that crook!” “Our little Bobby never got a C in his math classes.” “How much did you invest with Madoff?” These words just send chills down the spine, don’t they? Well, dear reader, we don’t want you to have to endure such torment this year. Instead, we’d like you to be the hero of your Thanksgiving dinner, by equipping you to talk about something that will not promote strife, but instead edify and enrich everyone there – finance.…

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Financial Institutions Case Study: Asset Liability Management Our Client: A regional bank with a newly issued brokered CD portfolio. Situation: Our client was asset-sensitive and had just issued 5yr brokered CDs that paid a fixed rate of interest. The client lends to borrowers at a floating rate of interest plus a credit spread, with a nominal floor. The net interest margin (NIM) would benefit from rising rates in the future, but in the short-term NIM was compressed by the long-term funding rate relative to the floored variable rate loan portfolio. Summary: Chatham Financial assisted the client with alternative hedging scenarios to reduce the impact of its relatively high, fixed-rate long-term funding. The client was considering a receive-fixed swap vs. a floating rate with sold floor based on the Prime rate, with the intention to designate the combined swap/floor against its…

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Real Estate Case Study: Debt Ratio Our Client: A public real estate company specializing in asset management in the hospitality sector. Situation: Our client had paid down a significant portion of their floating rate line of credit, leaving them with a fixed/floating rate debt ratio higher than they desired. With hotel assets essentially re-pricing daily, the client wanted to increase their floating rate exposure on the liabilities side to better match the characteristics of their assets. Summary: We discussed entering into a receive-fixed swap to rebalance their fixed-floating mix. A secondary benefit of this strategy was that it allowed them to reduce their current interest expense due to the steepness of the yield curve; the receive fixed swap synthetically transformed a higher fixed rate obligation into a lower floating rate obligation, based on an historically low current LIBOR setting. Because…

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Brace yourself. Here come the zombies. Sure, you’ll still get a variety of trick-or-treaters at the door this year – Miley Cyrus and Si Robertson sightings should be plentiful – but make no mistake, the undead will walk the streets in record numbers. Our zombie fascination is still growing, and yet they already seem more popular than those soulful Twilight vampires ever were. Hollywood has both cultivated and capitalized on our undying interest, with hit movies like I am Legend and World War Z, and top rated shows like AMC’s The Walking Dead (entering its 4th season). There’s even a zombie romantic comedy, Warm Bodies, that’s a decent choice for date night. It should surprise no one, then, if a band of zombies rings your doorbell, demanding brains, but settling for your Snickers® and Kit-Kats®, this Halloween. The zombie apocalypse…

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Twinkie enthusiasts mourned last November when the iconic snack left shelves, following the Chapter 7 liquidation of Hostess Brands after eighty-two years in operation. Many took to social media to wax nostalgic and bemoan the loss of the fabled vanilla-cream-filled sponge cake, a staple of American snacking indulgence since the Great Depression. The rest raced out to grab the last remaining inventories in big-box and convenience stores – after all, Twinkies were portrayed in Die Hard and Zombieland as resilient enough to last one thousand years and sustain humanity despite a zombie infestation, respectively. What brought Hostess Brands to the point of liquidation? As noted in the Wall Street Journal, the company’s far-flung manufacturing operations included 11 factories, each of which was operating at about half-capacity; meanwhile, its thousands of drivers traveled directly to each individual convenience store to make…

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Ok, so maybe we haven’t seen a run up in rates like this in, oh, almost three years, but that doesn’t mean it’s time to panic. After all, we are still in a period of extraordinary accommodation, in zero-interest-rate-policy land, still enjoying the lowest rates of our lifetimes. The economy is thought to be doing pretty well right now – not the best that it can be, but growing steadily and generating jobs at a modest clip – and apparently that’s the problem. If the economy is doing better, then maybe we no longer need so much stimulus, and if we reduce said stimulus, we are surely one day closer to stopping it altogether, and reversing course. So, what exactly did we witness last week? Plain and simple, market participants are anticipating the end to quantitative easing and transitioning to…

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I hope you’re hungry, because Bloomberg is serving up the next financial scandal. Last summer we learned about LIBOR manipulation, and how various panel banks had attempted to nudge the daily LIBOR fixing up or down with contributed rates that were “suggested” by their trader-friends, who would benefit from the resulting small directional movements. By all accounts, the rate scandal was a very big deal, shaking faith in over $300 trillion in linked financial instruments, spurring numerous investor lawsuits, and leading to The Wheatley Review, with its call for overhauling the structure, ownership, and oversight of this benchmark interest rate. If you thought it would be hard to imagine a bigger scandal, then apparently we all just lacked imagination. The LIBOR scandal is but a mere Hors d’oeuvre, compared to the enormously large feast that is the fixing scandal in…

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