Written by John Wilen for Debtwire on January 31, 2019
Officials from the Structured Finance Association report that credit card ABS issuers are beginning to include language in new LIBOR transactions that grants servicers the authority to adopt replacement rates. Servicers and trustees no longer require bondholder consent, streamlining the amendment process.
In recent RMBS and non-US ABS transactions, similar language has been used. Kristi Leo, head of investor policy at the Structured Finance Association, indicated that this transaction structure is unlikely to emerge as an ABS industry template. The language excludes indemnification, leaving servicers susceptible to legal action from frustrated investors. Given the risks associated with changing benchmark rates, many third-party servicers will be reluctant to adopt an expanded role in ABS transaction management. “When you’re talking about a third-party servicer,” Leo said, “they do not want that responsibility.”
Citi Bank adopted the new language last July, setting the industry standard for subsequent ABS deals. In recent months, Discover, American Express, and Barclays’ Dryrock platform have all granted their servicers the authority to transition to alternative rates.
The updated prospectus language does place some limitations on servicer discretion. If LIBOR continues past its expected end date, it is unclear how servicers could proceed in adapting their deal’s benchmark rates. Intercontinental Exchange is reportedly collaborating with UK panel banks to ensure that LIBOR continues past its 2021 desertion.
Thus far, the updated language has only appeared in new transactions. Many existing ABS deals are LIBOR-dependent, and they require 100% noteholder consent to grant the servicer the authority to adjust their benchmark rate. Julie Gillespie, an attorney at Mayer Brown, reports that “it is not typically practical to obtain the required noteholder vote.” While the official replacement rate remains unknown, many noteholders would be reluctanct to shift their securities’ benchmark. The Structured Finance Association will begin working with industry leaders to develop a consensus approach to legacy transactions this quarter.
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