Concept of real estate, mortgage and lease

The transition to new interest rate benchmarks has gone fine with newer vehicles, but some legacy structures have struggled, according to Fitch Ratings.

The rating agency reported that, in the U.K., residential mortgage-backed securities (RMBS) transactions that closed prior to the global financial crisis “have struggled to complete the transition” away from LIBOR, the benchmark built into those deals.

LIBOR was to be phased out by the end of 2021, although the Financial Conduct Authority (FCA) has allowed the use of a synthetic LIBOR until the end of 2022.

So far, 41 of these RMBS transactions have sought investor consent to revise their terms, with 34 deals being amended, Fitch said, while seven have failed to reach resolutions. Another 18 transactions have yet to propose amendments, it noted.

If these transitions aren’t completed before synthetic LIBOR is retired, the prospect of disruption in these vehicles represents a credit rating risk, it said.

“We consider transactions at highest risk when [investor] consent solicitations have failed, regardless of sponsor status or currency of exposure, or where no transition has been initiated,” it said.

The one- and six-month synthetic LIBORs are to be eliminated at the end of the year, and the FCA is to consult on when to wind down the three-month LIBOR, which is used in many of these older RMBS deals, the report noted.

“Its retirement would represent a firmer deadline for transition. Failure to meet this would cause disruption and increase the risk of negative rating actions,” Fitch said.

Canadian financial markets are facing their own shift to a new benchmark over the next couple of years, with CDOR to be phased out by mid-2024.