Libor’s end leaves nearly $2 trillion of debt facing legal limbo

Almost $2 trillion of debt pegged to dollar Libor, much of which can’t easily be shifted to an alternative benchmark, won’t mature until after the discredited rate expires in mid-2023, according to the Federal Reserve-backed group guiding the transition.

As much as $1.6 trillion of securitizations and $300 billion of bonds risk falling into legal limbo in the coming years because they lack provisions necessary to switch to new benchmarks, the Alternative Reference Rates Committee said in a report Monday. Gov. Andrew Cuomo of New York has proposed legislation in the state’s budget plan to impose fallback rates on so-called tough legacy contracts that fall under state law, while Federal Reserve Chairman Jerome Powell last month said national legislation is needed to ensure a smooth transition.

Andrew Harrer/Bloomberg

The figures come in a progress report that reveals how entrenched the benchmark remains in the financial system, with roughly $223 trillion in total exposure remaining less than 10 months before the final deadline for issuing new contracts pegged to the reference rate. While the vast majority of that is in the form of financial derivatives, about $300 billion of floating-rate notes, $800 billion of mortgage-backed securities and $500 billion of collateralized loan obligations aren’t set to mature until after mid-2023, according to the report.

“These figures indicate that the task now before market participants in ending new use of Libor this year will be challenging,” the ARRC said in a statement.

The benchmark remains hardwired across markets more than three years after global regulators began efforts to phase out Libor following a manipulation scandal and shortage of underlying trading data. While most Libor rates will retire at year-end, regulators have extended key dollar tenors for a further 18 months, driven partly by slow progress toward replacement rates.

The benchmark also remains particularly entrenched in the loan market. Only a handful of banks have begun to offer bilateral business loans linked to the Secured Overnight Financing Rate —
the main U.S. Libor replacement — and are in the process of moving their new business away from Libor. Most lenders continue to use Libor as their primary or sole floating-rate business loan option.

“The exposure that matures past mid-2023 is certainly a concern, but this is why the ARRC is flagging it — it’s an attempt to accelerate the transition,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities in New York. “Thankfully the lenders and borrowers in these contracts have some time to renegotiate before mid-2023 and there is time to work on legislative solutions.”