Much of the US securitization market on April 11 is expected to make a complete switch to using US Treasuries from Libor swaps as the benchmark for fixed-rate deals, the Structured Finance Association said.
The SFA said it had reached a consensus with its members to use the interpolated Treasury curve or "I-curve" for primary and secondary trades as the preferred alternative to Libor swap rates which are scheduled to cease publication in June 2023.
Some borrowers in the primary market this week have already adopted the new benchmark.
"It's going to end up being being a fairly easy switch," an ABS banker said.
Many market participants reckon the ease and liquidity of Treasuries offset concerns about their volatility. Investors in particular favor Treasury-based spreads because they can easily compare structured finance spreads with those on corporate bonds.
"It will take some doing to transition but then everyone will be better off by allowing more apples-to-apples comparisons of spreads between asset classes," a senior portfolio manager said.
SFA laid the groundwork for the transition at the start of the year with surveys and discussions with banks, investors, issuers and other market participants.
All new fixed-rate ABS, RMBS and CMBS issues are recommended to price off the I-curve next Monday, while all secondary trades are expected to start being quoted using new benchmark on that date, the industry trade group said.
"Let's use a consistent curve for everything," SFA President Kristi Leo said.
The transition comes at a time when fixed-rate ABS issuance remains historically high even while the Federal Reserve signaled it would embark on a series of rate increases to bring down inflation. In 2021, fixed-rate paper accounted for 96% of all new asset-backed supply, according to SFA.
Smooth sailing so far
So far, there have been no hiccups in the transition to the I-curve. On Tuesday, General Motors priced the first fixed-rate ABS referencing Treasuries this week, a US$1.361bn prime auto loan issue GM Financial Consumer Automobile Receivables Trust 2022-2. Auto ABS deals from Santander and Toyota are also expected to price this week using the I-curve while Avis Budget has also adopted the new benchmark for its latest car rental ABS.
"Feedback from the market said the deals' transition to the I-curve went very smoothly with the issuers and underwriters standing ready to help with any questions," Leo said.
Still, Leo said the switch to Treasuries is an industry best practice. SFA cannot force members to adopt it.
Some deals were still priced using Libor swaps this week. Auto lender World Omni Financial on Tuesday issued a US$819.8m vehicle lease securitization World Omni Automobile Lease Securitization Trust 2022-A which referenced Libor swaps.
Mortgage finance agencies Fannie Mae and Freddie Mac meanwhile are expected to continue using SOFR swaps or the "P-curve" as their Libor alternative rather than joining the rest of the market in adopting the I-curve, market players said. SOFR swaps are seen as a more efficient hedge for the two agencies' huge mortgage books than Treasuries. Fannie and Freddie could not immediately be reached for comment.
On Wednesday, Freddie referenced the P-curve for its US$1.1 multi-family CMBS, Freddie Mac WI-K144.