CLOs retreat back to Libor as Sofr gets cancelled

By Faro Ipoll

Cancel culture has arrived in the CLO market, with newly implemented benchmark Sofr having been scrapped in favour of a return to Libor, after it 'made managers feel sad'.

Finding a replacement reference rate for Libor has taken years of work and affected all corners of financial markets, from corporate debt through to retail mortgages. But sources say a few big CLO managers finally put their foot down as it had become too annoying.

"There's been a growing dissatisfaction about how all this was affecting the deal pipeline," said one source who had complained to regulators. "What with the inconvenience also of Ukraine."

While it is unusual for one small set of participants in a single industry to wield such far-reaching influence across the global spectrum of products, the managers in question were surprised in this case to find a sympathetic ear with regulators and key political figures.

"Dealers manipulating Libor was egregious," said Senator Elizabeth Warren. "But this Sofr business is dull and for me that's worse. I haven't been nearly angry enough lately and it's left me at a loss if I'm honest. Today I found myself demanding a central bank digital currency for heaven's sake!"

The SEC had also been secretly lamenting its role in the transition.

"We all thought this would be a new dawn for intelligent regulation," said chair Gary Gensler. "But if I read one more headline saying 'Sofr so good' I am going to lose it."

The turnabout has left many shocked and baffled, not least the Libor traders that now have to keep on supporting a market for which they have been pilloried since price-setting came onto the radar of financial watchdogs.

"It's certainly a turn up for the books," said one legally challenged participant. "But I've got to welcome the news that something else is more cancelled than me. Maybe I should set up a Whatsapp group with the lads to have a chat about it."

But the Alternative Reference Rates Committee is thought to be pretty miffed, with sources saying it is preparing an analysis piece entitled "WTF was that all about?"

It appears already too late for Sofr to rehabilitate its reputation, however, given the amount of memes CLO managers have shared.

"The final straw was when the ruddy spot basis went above 35bp this week," says Todd Unctious, a CLO equity investor, and also one of the instigators. "I had been arguing for three months that CLOs should price liabilities at the spot level rather than the 26bp recommended adjustment, and now we've blown past that I'm going to have to advocate in favour of 26bp."


TAGS: Europe Regulation Structured credit CLO North America checkthedate

Comment by: Imran Bora. Posted 1 year ago [2022-04-01 19:23:41]

April fool's?

Comment by: Sayed Kadiri. Posted 1 year ago [2022-04-01 19:15:21]

The very same! His colleague and Sofr transition expert Dougal Maguire has added: “It’s no good, we’ll never get it absolutely perfect”

Comment by: Anonymous. Posted 1 year ago [2022-04-01 15:06:23]

Todd Unctious from Father Ted Christmas Special fame?

Comment by: Anonymous. Posted 1 year ago [2022-04-01 15:00:03]

Best Creditflux article I have ever read.

Comment by: Anonymous. Posted 1 year ago [2022-04-01 14:38:20]

Good one Faro!