LIBOR replacement on track for 2021

MIAMI — LIBOR’s replacement is top of mind at this year’s ABS East conference, and the general sentiment among issuers, investors and trustees is that a new overnight funds rate will be solidified by the targeted 2021 release.

“[The industry] is getting to a point where people are narrowing down [the details] and [LIBOR’s replacement] is closer to a universal fix,” said Rick D’Emilia, managing director of ABS at Wilmington Trust, an investment firm that works with auto ABS issuers such as CarMax, Santander Consumer USA and Tricolor Auto Acceptance.

“The problem is the securitization deals are three to four years, and you’re signing them now — so it’s a serious top of mind [issue],” D’Emilia said, noting that new securitization contracts signed will overlap with the targeted date for LIBOR’s replacement.

“As trustee, our role in these transactions is to make sure everyone is following the rules,” D’Emilia said, noting that the most important aspect of LIBOR’s replacement is the presence of clear and concise language to avoid ambiguity. “It has to be definitive — there’s not supposed any interpretation,” he added.

While it’s still unclear whether the market will fully adopt the Federal Reserve’s Secured Overnight Funds Rate as its index going forward, the industry is making progress, said Patrick Tadie, senior vice president of capital markets structured financing at Wilmington Trust. “So far there’s a lot of information gathering,” he added.

“I think where people get hung up is at some point you have to start looking at technology and how it’s going to be implemented, so the industry is going to have to make decisions relatively quickly,” Tadie said, noting that much of 2020 will need to be spent testing the new index.

In terms of investor sentiment, D’Emilia is “pleasantly surprised” as to how resilient the auto ABS market has been, considering the volatility that has been happening, such as uncertainty with LIBOR’s replacement and fears of an impending recession. “Deals continue to get done,” he said. “Deals continue to get oversubscribed.”

“Investors like short-term assets — that’s what drew them to the auto ABS market in the first place,” D’Emilia said. “Auto’s a little different because they keep extending their loan terms, but investors aren’t as worried because nothing happened to auto ABS in 2008 and 2009 during the recession,” he noted.

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