Opinion Credit

Welshcake

Wales’s status as a literary power house has long been known. In fact, it was what sold Romans their first tickets to come over here. But it can’t have gone unnoticed that our bent is towards fabulism — and this can easily lead us into the territory of horror stories.

However, the importance of Machen’s achievement cannot be overstated. The influence of The Great God Pan resounds in the wing flaps of Bram Stoker’s Dracula and the deep, unsettling gurgles of HP Lovecraft’s Call of Cthulhu mythos. Stephen King has acclaimed the tale as the best horror story in the English language.

Small changes can trigger tumult

Many seemingly small horrors are upon us as we head into 2022. Chief among these is news that Cornish ‘town’ Marazion is making an outlandish bid to become the UK’s smallest city, dethroning St David in Wales.

You can imagine my presentiments of dread. This candidate, boasting little more than a scattering of pubs, should more realistically be viewed as neighbouring non-city Penzance’s unwanted detritus. Whether Marazion has — as claimed — 100 fewer inhabitants than St David’s is only a matter of the extent of Penzance’s fish and chip economy. Marazion has not even a whiff of a cathedral. It is just near some island with a castle.

Facts matter. For a nation staring down the multiple barrels of omicron, Bank of England rate hikes, wrecked supply chains, an Uber driver shortage and the sordid details of Boris Johnson’s Secret Santa, an upheaval of such seismic, church versus state proportions is the last thing it needs. St David’s standing is steeped in ancient tradition going all the way back to 1995.

For the credit market, small details will also speak volumes going into 2022. It is easy to miss this amid recent turbulence and headlines about grand central bank policy nightmares, but the watershed transition from Libor to Sofr will front-load operational risks and even my natural optimism does not extend to believing everyone will be ready for it.

Sofr-based disruption looks a sure bet in January — be it for the leveraged loan and CLO pipeline or even the reputedly savvy derivatives market. It’s not been entirely encouraging to read the International Swaps & Derivatives Association opine that “the foundations for an orderly transition are in place” and “no-one can say for sure what will happen on 4 January” when a key benchmark historically underpinning trillions of dollars of transactions is cancelled.

Isda’s Ibor fallbacks for non-cleared derivatives are of course a welcome safety net. But the weight of evidence is that many more firms than anticipated will rely on these to transfer from Libor — a fact which does not engender confidence they have systems in place to handle spread-adjusted risk free rates.

This is all worrying enough without even getting into concerns about how Sofr will diverge from Libor if market volatility persists. Who is ready and who is not will quickly become apparent, and the results will provide an uncomfortable spotlight on all who are unable to process transactions due to a lack of understanding of the new landscape or the equipment to traverse it.

CLO primary market activity in the run up to Sofr is illuminating. There has been a clear preference among some of the industry’s big name managers for shorter-dated deals in December in advance of the transition. Hopefully the rest of the market is paying attention. A big dent in supply must be coming.

One solace for those of us hiding behind the Sofr at the mention of CLO horror stories is that 2022 will be a year where being slow is not such a bad thing. Leveraged loans showed their resistance to fear in the late November market rout — which is one of many reasons CLOs will be a succèss fou as the rest of credit succumbs to quotidian scares.