Municipal bond issuers should heed the advice to enter no new Libor-based contracts in 2021, according to Cindy Harris, the chair of the Government Finance Officers Association working on the phase-out of the benchmark.
That advice comes from New York Federal Reserve Senior Vice President Nathaniel Wuerffel, who suggested Thursday that the financial services industry make it a New Year’s resolution.
“All firms should stop writing new Libor contracts as soon as practicable, and in any event no later than the end of 2021,” Wuerffel said during an online forum sponsored by the Securities Industry and Financial Markets Association.
The GFOA Debt Committee is working on issuing a similar Libor advisory in January or February, Harris said.
Ken Bentsen, president and CEO of SIFMA, said the transition from Libor to alternative rates is “a top priority for SIFMA and our member firms.”
“SIFMA supports market, legislative and regulatory efforts to ensure a smooth transition, while avoiding market disruption and legal uncertainty,” he said.
Wuerffell suggested two other New Year’s resolutions: to begin using the Secured Overnight Financing Rate as an alternative reference rate and to work off legacy Libor contracts.
SOFR is one of several alternative interbank offered rates (IBORs) and is widely expected to be the most used. The SIFMA rate has been used by the Iowa Finance Authority for the last couple of years in the derivatives it issues, said Harris, who serves as its chief financial officer.
The advice on New Year’s resolutions to tackle the phase out of Libor in the coming years serves as a counterpoint to the Nov. 30 announcement that the wind down of Libor-based legacy derivatives and contracts will continue through mid-2023.
Dec. 31, 2021, remains the termination date for new contracts using Libor.
The ICE Benchmark administration said it will consult on when to end the publication of various U.S. dollar Libor settings. If adopted, the plan would cease the major Libor tenors in mid-2023 for overnight, 1-month, 3-month, 6-month, and 12-month lending. The Libor settings for 1-week and 2-months would terminate at the end of 2021.
The Bank Policy Institute, a financial services lobbying group, called the delay until mid-2023 a “prudent step.”
Barclays estimates 41% of the $330 billion of outstanding floating-rate notes mature before the end of next year and the extension through mid-2023 raises it to 80%.
The Loan Syndications and Trading Association estimates 90% of leveraged loans have a maturity after 2023.
Harris said the new deadline will have less impact on the municipal bond sector than other areas of financial services.
“On the municipal side we tend to have longer-dated derivatives because we are issuing longer-dated debt,” said Harris. “We are not usually doing debt for just one or two years. They are longer capital projects.”
GFOA does not have an estimate of how much municipal debt expires after June 2023.
Harris said the market in general already is encouraging issuers to not enter into new Libor contracts and, if they do, to have robust fallback language.
The International Swaps and Derivatives Association announced Oct. 23 its IBOR Fallbacks Supplement and IBOR Fallbacks Protocol.
ISDA said the supplement amends its standard definitions for interest rate derivatives to incorporate robust fallbacks for derivatives linked to certain IBORs, with the changes coming into effect on Jan. 25, 2021. From that date, all new cleared and non-cleared derivatives that reference the definitions will include the fallbacks.
