Hi, I'm Jerry Dorost, portfolio manager
with Cohen & Steers
and I want to provide you with an update
around our thoughts on LIBOR and the
potential for it to sunset
at the end of 2021. I'll focus on three
main topics today.
First - what is the change? Second - what
does this change mean
for preferred securities? And finally,
I'll conclude with our outlook.
So to start, what is the change? We
expect
LIBOR to be phased out at the end of
2021, though the COVID-19 pandemic
might push out that that timing a bit.
Markets have been
slowly transitioning to an alternative
benchmark,
but there are many uncertainties that
still remain as a clear path
forward
on the transition has not yet been
reached
among many stakeholders. The Fed has
endorsed the Secured Overnight Financing
Rate
known as SOFR as the likely successor
for LIBOR.
SOFR does improve upon many
shortcomings of LIBOR
and that's because it is underpinned by
a very deep and robust market. That's the
Treasury
repurchase market, but i'd highlight
that market is a secure market and those
secured rates
don't offer a spread that is as dynamic
and credit sensitive to the
unsecured cost of bank credit like LIBOR
does.
So next, what does this mean for
preferred securities?
The transition does have a very
important bearing
on preferred securities, because about
two-thirds of the preferred securities
market
does have LIBOR-based payment resets
in them. So I'd also highlight that
there is contingency or fallback
language
that could take effect in the event
that LIBOR
ceases to exist, but that
contingency language does vary across
issues and some of that language
is
better than others and that inferior
language could put investors at a
disadvantage.
There have been some recent new
preferred
issuances that have completely moved
away
from LIBOR. There have been
SOFR-based issuance
and recently there's also
been Treasury-based resets.
And those treasury based resets are,
in our opinion, in some ways a
notable
improvement over LIBOR and SOFR
because
the Treasury curve is normally
upward sloping, so you're resetting off
of a higher point
on the curve and the recent transactions
do have very wide spreads that would
reset off of that high point
on the curve. But just like SOFR,
Treasuries are not credit
sensitive
and dynamic the way that LIBOR
is.
We are looking at some older
transactions that were issued before
2017. Those older transactions do have
inferior
fallback or contingency language. We do
think about how issuers might exchange
those transactions into newer deals,
with more up-to-date documentation.
We're also thinking about how a
a sweeping statutory change could be
unveiled and and how that could actually
supersede
company-specific documentation. So as
active managers, we're looking at the
these risks and going through the
prospectuses to
identify the securities that we think
are better positioned
through this transition. So lastly to
conclude on our outlook. We do
think that there are
some risks remaining in in this
transition
but we do want to highlight there has
been very good progress made.
Investors must think about those risks
and price the
the complexities along with
that transition.
We are expecting a relatively smooth
transition
but should market misunderstandings
occur
we we will look to take
advantage of those types of
opportunities.
To conclude, for a detailed and
very complete discussion
of this transition, I would encourage
you to to look at the white paper that
we recently published.
It's titled "Preferred Securities in a
Post-LIBOR World"
and it can be found on the Cohen &
Steers website.
So thank you very much for your time and
your interest today
and I look forward to updating you again
in the future.
