Franklin Templeton, one of the world’s largest asset managers, has warned that the uncertainty surrounding the future of the Libor global interest rate benchmark is making debt sellers nervous; as a result they are making “alarming” changes to their financial contracts.
Although regulators plan on replacing the Libor by the end of 2021, but since it is used as a reference and is thus embedded into assets worth tens of trillions of dollars, the process naturally is far from easy.
Sceptics have raised doubts as to whether such a significant change can be made on time, and have even scoffed at the possibility of such a task terming it as being too ambitious.
In a blog post, two top debt manager of Franklin Templeton have warned that serious problems have already started to emerge.
As per Reema Agarwal and Mark Boyadjian, from Franklin Templeton’s ‘Floating Rate Debt Group’, many companies were adding language to their new kiab credit arrangements that allow them to choose a replacement rate for Libor, without lenders’ consent.
Significantly, what is even more worrisome is that in some cases, the new language was not made available in the draft documents that were sent to investors but were inserted in the final executed versions of the credit agreements, said the duo.
“The legality and underhandedness of inserting such a provision are debatable,” wrote Agarwal and Boyadjian.
This makes the possibility of a change in the terms of the financial contract very real with the buyer not being aware of the change of status in the asset that he has just purchased.
This is an “an alarming trend” they said. “In our opinion, it’s a cardinal rule of lending that each affected lender should consent to a proposed reduction in the interest rate of a loan.”
As a result, Franklin Templeton will therefore closely scrutinize the fine-print of credit agreements and will not hesitate to walk away from any potentially attractive deals if its terms weren’t transparent, said the duo.
Franklin Templeton has around US$750 billion worth of assets under its management.
References:
https://www.reuters.com
Although regulators plan on replacing the Libor by the end of 2021, but since it is used as a reference and is thus embedded into assets worth tens of trillions of dollars, the process naturally is far from easy.
Sceptics have raised doubts as to whether such a significant change can be made on time, and have even scoffed at the possibility of such a task terming it as being too ambitious.
In a blog post, two top debt manager of Franklin Templeton have warned that serious problems have already started to emerge.
As per Reema Agarwal and Mark Boyadjian, from Franklin Templeton’s ‘Floating Rate Debt Group’, many companies were adding language to their new kiab credit arrangements that allow them to choose a replacement rate for Libor, without lenders’ consent.
Significantly, what is even more worrisome is that in some cases, the new language was not made available in the draft documents that were sent to investors but were inserted in the final executed versions of the credit agreements, said the duo.
“The legality and underhandedness of inserting such a provision are debatable,” wrote Agarwal and Boyadjian.
This makes the possibility of a change in the terms of the financial contract very real with the buyer not being aware of the change of status in the asset that he has just purchased.
This is an “an alarming trend” they said. “In our opinion, it’s a cardinal rule of lending that each affected lender should consent to a proposed reduction in the interest rate of a loan.”
As a result, Franklin Templeton will therefore closely scrutinize the fine-print of credit agreements and will not hesitate to walk away from any potentially attractive deals if its terms weren’t transparent, said the duo.
Franklin Templeton has around US$750 billion worth of assets under its management.
References:
https://www.reuters.com
