Should I worry about synthetic Libor?

by Charles Tricomi, head of leveraged loan research, Xtract Research

The creation of synthetic Libor means that, even in its death throes, Libor still sows confusion

The date on which the ICE Benchmark Administration (IBA) will cease publishing the remaining available tenors of Libor is fast approaching. But initially, publication of all tenors of Libor was supposed to cease on 31 December 2021. Then on 30 November 2020, the IBA and the Financial Conduct Authority (FCA) threw a wrench in the works by announcing that publication only of 1-week and 2-month Libor would cease after 31 December 2021; publication of the other tenors would continue until 30 June 2023 in order to accommodate a market that was (at least to the FCA) insufficiently prepared for the transition.

At the time, we criticised the delay as letting “the steam out of any effort to amend existing agreements which have not yet provided for a successor, since the most popular tenors will continue to be available”.

The arrival of synthetic Libor

Lobbing another wrench, the FCA announced on 3 April 2023 that it would compel the IBA to publish a synthetic Libor through 30 September 2024. Again, being overly solicitous (in our view), the FCA was concerned that there were still agreements in the market which had not provided for a fallback. It told the IBA to continue to publish one-, three- and six-month US dollar Libor using a synthetic methodology.

The methodology dictates that the synthetic value will be term Sofr plus a spread adjustment depending on the tenor: 11bps (one-month); 26bps (three-month); and 43bps (six-month). Look familiar? It should — it’s the ARRC hardwired approach.

Sofr vs three-month Libor (%)

Source: New York Federal Reserve; ICE Benchmark Administration

So who needs to worry that Libor will continue to haunt them for another 15 months? In the US syndicated loan market, it should not be anyone whose agreement adopted the hardwired approach. It also should not be anyone whose agreement adopted the amendment approach, which triggered the Libor transition when Libor was either not available or not representative (ie, did not represent the interbank lending market).

Even though one could make the argument that Libor is still available (in its synthetic form), the FCA was very specific in its direction to the IBA that synthetic Libor was not representative.

30 Sep 2024

Eventually, even synthetic Libor must come to an end

Synthetic Libor will most likely affect those loans about which nothing was done during the past six years to provide for a Libor successor (and, believe it or not, there are some) and which reference only a “screen” of a financial data provider to determine Libor.

Since the IBA will continue to post the synthetic Libor value on those screens, it may well be that those laggards that ignored the Libor frenzy — and those that followed the ARRC mandate and adopted the hardwired approach — end up in the same boat.

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