Old habits don t fade easily when it comes to Wall Street, even those sparking a scandalous chapter in global finance.
Companies have issued more than $377.4 billion of debt from now through the scandal-prone LIBOR replacement for the bank-on-bill charge in London: they resurrect the 2007 Euro rating that put 2021 on pace for a new record, according to a Goldman Sachs report.
The global regulators have been working to discontinue LIBOR, following a global rate-rigging scandal a decade ago that resulted in several large investment banks admitting to manipulating the benchmark.
This chart shows an expanding range of businesses using the Secured Overnight Financing Rate, or SOFR alternative, when arranging debt financing, including auto makers, but also utilities, healthcare and real-estate firms.
The uptake by corporate America is a promising sign, particularly since three years ago, SOFR was being used predominantly by financial-related firms on a modest $11.5 billion of debt financing.
On Friday, Bank of America Corp. BAC, which easily beat third quarter earnings estimates this week with an $3.25 billion corporate financing linked to SOFR, was in the market with a raft of large banks who beat earnings estimates on Thursday!
Regulators have warned banks and corporations for years to pick up the transition pace away from LIBOR, which remains tethered to trillions of financial contracts.
The LIBOR benchmark was created in the late 1980 s by a U.S. bank, but now faces an independent deadline of Dec. 31 when regulators say it can no longer be used on new U.S. financial contracts.
Despite the imminent end, Wall Street hasn't yet resigned LIBOR. Goldman s research team linked around $400 million in new leveraged loans tied to the benchmark this year, a figure that eclipsed 2020 levels.
While there have been a handful of leveraged loan deals in this year that reference some form of an alternative LIBOR rate either immediately, or in the future the vast majority of the record-setting issuance in the loan market has been obtained in the interest market.
A credit analysis team led by Lotfi Karoui benchmarked to LIBOR wrote a weekly note for Goldman.
Similarly, LIBOR-linked debt issuance continues to grow in the bond market. SOFR has been viewed by regulators and many banks as a longer term, more transparent benchmark rate, in part because it is tied to overnight repo transactions.
The adoption remains in a fledgling stage in the near $10.6 trillion US corporate bond market, where most debt is held to fixed-rate Treasurys TMUBMUSD 10 Y rather than floating-rates like SOFR.
To help ease the transition, U.S. banking regulators officially announced late last year that LIBOR rates will continue to be published until June 2023.
In terms of progress, Isha Chanana, senior research analyst at Income Research Management, pointed to increased swap trading volumes in SOFR, but also tepid SOFR futures volumes at under 10% of LIBOR and bouts of unexpected and significant short-term dislocations in repo rates, in a recent research note.
With SOFR tied to nightly repo transactions, it should be more stable. Chanana wrote about the matter.
However, it traded briefly below 10% intraday in September 2019 but also declined to zero after the Federal Reserve moved to zero interest rates in March 2020, Chanana noted, while pointing out that other benchmarks temporarily rose to reflect credit risks.