ABS Markets

Transition Issues

In relation to the asset-backed securities themselves, i.e. the front-end of an ABS structure, the considerations highlighted elsewhere in relation to FRNs apply equally, both in relation to legacy and new issuances.

A complicating factor, however, is that ABS structures are dependent (from a cash-flow and rating perspective, often critically) on the economic performance and behaviour of a host of underlying assets and related instruments – e.g. the loan/mortgage pool (and any hedges for the same), any interest rate and cross-currency hedges for the ABS and any swaps providing guaranteed balance, liquidity, transformation or credit enhancement. ABS structures may also feature liquidity facilities, GIC accounts and repo. To the extent that any of the foregoing contains an IBOR component, care will need to be given to repapering, in relation to legacy transactions, and to initial structuring, in relation to new transactions that reference RFRs.

Industry Position

So far the only work that has been done in relation to ABS is by AFME, which has recently published Benchmark Rate Modification language intended to apply to RMBS securitisation transactions. This obliges the note trustee and issuer to concur in deciding how to deal with IBOR discontinuance according to a fall-back waterfall.

However, this waterfall is, notably and problematically, different to the fall-backs set out in the ISDA Benchmarks Supplement (which is the equivalent solution with respect to the OTC derivatives market that has been developed by ISDA) and so is not suitable if, as will more often than not be the case, related hedges are intended to move in tandem, economically, with the notes.

Parties may address this risk by expressly providing in the relevant Confirmation(s) that, in relation to hedging transactions that are subject to the terms of the Benchmarks Supplement, the provisions of the Benchmarks Supplement are disapplied and instead bespoke fall-back provisions, themselves set out in the relevant Confirmation(s), apply.

Frequently Asked Questions

Q. At the note level, can’t I just substitute an RFR for IBOR?

A. No. The metrics are different and without an adjustment (e.g. to the spread) to compensate for this, the note economics will be fundamentally altered. In addition, interest will accrue differently, payment mechanics will alter and systems will need to be modified accordingly.

Q.Is a Protocol or similar solution to the problem contemplated?

A. No. It is likely that repapering will have to occur on a transaction by transaction basis.

Q. Can’t I just use the AFME language?

A. The AFME language is intended for RMBS transactions. It can be adapted, of course, to other forms of ABS but consideration will still have to be given to how any related hedge deals with transition, so as to ensure that the note and any hedges move in tandem. Thought will also have to be given to every instrument within the structure that references an IBOR that is to be substituted by an RFR, so as to ensure ongoing structural integrity. In relation to new transactions, perhaps the only viable short-term solution is to structure the deal around the underlying assets as best one can, tailor hedges and other instruments accordingly and include IBOR discontinuance as a risk factor in the note prospectus.

Frequently Asked Questions

Q. At the note level, can’t I just substitute an RFR for IBOR?

A. No. The metrics are different and without an adjustment (e.g. to the spread) to compensate for this, the note economics will be fundamentally altered. In addition, interest will accrue differently, payment mechanics will alter and systems will need to be modified accordingly.

Q.Is a Protocol or similar solution to the problem contemplated?

A. No. It is likely that repapering will have to occur on a transaction by transaction basis.

Q. Can’t I just use the AFME language?

A. The AFME language is intended for RMBS transactions. It can be adapted, of course, to other forms of ABS but consideration will still have to be given to how any related hedge deals with transition, so as to ensure that the note and any hedges move in tandem. Thought will also have to be given to every instrument within the structure that references an IBOR that is to be substituted by an RFR, so as to ensure ongoing structural integrity. In relation to new transactions, perhaps the only viable short-term solution is to structure the deal around the underlying assets as best one can, tailor hedges and other instruments accordingly and include IBOR discontinuance as a risk factor in the note prospectus.

Check list of things to consider

  • What are the relevant RFRs for my currencies/tenors?
  • When do I want the change to take effect?
  • Is there to be a spread adjustment?
  • Do my terms and conditions need amending?
  • Do I need noteholder and/or rating agency consent?
  • Are there regulatory capital and/or compliance implications?
  • Are there implications for payment mechanics, financial covenant testing, mark to market etc.?
  • What other instruments are in my structure? How is IBOR disappearance being dealt with in those and what do I need to do to ensure ongoing structural and economic integrity? Should I include IBOR discontinuance as a risk factor in the note prospectus? Do I need expressly to disapply the terms of the ISDA Benchmarks Supplement with respect to such instruments?

Fieldfisher Contacts

ABS Markets

Simon Lafferty

Phone: +44 (0)20 7861 4932
Email: simon.lafferty@fieldfisher.com

Alex Campbell

Phone: +44 (0)20 7861 4188
Email: alex.campbell@fieldfisher.com

Marsili Hale

Phone: +44 (0)20 7861 4397
Email: marsili.hale@fieldfisher.com

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