Businesses hang on to Libor as deadline approaches

American companies must waive the London interbank offered rate for new debt at the end of December. Many want to make just one more deal before that.

As of January 1, banks will no longer be able to issue new loans or other financial contracts using Libor, which underpins trillions of dollars in business loans, derivatives and home loans. However, they may continue to reference Libor for debt issued before the year-end deadline until June 2023.

Financial authorities decided to phase out Libor in 2017 after traders at major banks pushed the rate up or down by submitting fake data. The banks in turn paid billions of dollars in fines and several traders went to jail.

Lenders are increasingly under pressure from regulators to reduce their exposure and that of their clients to Libor. Yet in recent weeks, companies such as consumer credit giant TransUnion LLC, crane component maker Columbus McKinnon Corp. and sportswear retailer Fanatics Inc. launched new leveraged loan offerings using Libor.

The Libor, which dates back to 1986, remains attractive to businesses for a variety of reasons, such as favorable rates and familiarity with its behavior, according to executives, lawyers and advisers. Executives have familiarized themselves with the use of Libor, they said.

Low interest rates and strong investor demand for higher yields on fixed income have spurred record sales of riskier Libor-linked corporate debt, such as leveraged loans, than corporations private equity funds are used to finance business buyouts. Total leveraged loan sales have already set an annual record in 2021 at over $ 585 billion through November, up from $ 288 billion in the previous year period, according to S&P Global’s LCD. Market Intelligence, a data provider.

Chicago-based TransUnion used Libor for two leveraged loans totaling $ 3.74 billion to help fund acquisitions of information services firm Neustar Inc. and identity protection firm digital Sontiq, both of which closed on December 1. A $ 3.1 billion loan will expire in 2028, while a $ 640 million loan has an eight-year term, TransUnion said. This means that the company will have to change the rate indicated on its loans as the June 2023 deadline approaches.

Many companies are considering switching to the secure overnight funding rate, or SOFR, the preferred replacement for Libor by U.S. regulators and Wall Street, analysts and executives have said. Others are evaluating credit-sensitive options such as the Bloomberg and Ameribor Short-Term Bank Yield Index, which reflect lenders’ funding costs and have a similarity to Libor.

Todd Cello, CFO at TransUnion LLC


Photo:

TransUnion LLC

“When Libor is no longer available, we have the option of using SOFR or other benchmarks,” said TransUnion CFO Todd Cello.

Columbus McKinnon recently raised a $ 75 million loan maturing in 2028 to finance its acquisition of industrial machinery maker Garvey Corp. approval from its creditors, CFO Gregory Rustowicz said.

“It was easier to continue riding with the Libor,” he said.

Mr Rustowicz plans to update the company’s credit agreement before the 2023 deadline and plans to replace Libor with SOFR the next time his company needs to refinance its debt.

Fanatics Inc. likely saved money by using Libor for a $ 500 million leveraged loan it got last month due to the difference in spread between that rate and SOFR, said. said CFO Glenn Schiffman. The Jacksonville, Florida-based company, which is privately held, has struck the deal to diversify its funding sources and invest more in its online platform, he said. The loan has backup provisions to eventually move to SOFR.

A lack of familiarity with replacement rates is prompting some companies to close a final Libor-related deal before Dec.31, said David Duffee, partner at law firm Mayer Brown LLP. “Businesses know this is their last obvious chance to do something at the cost of Libor,” he said.

Most companies will need to update their systems to handle compound interest calculations since they were not frequently required before SOFR, said Amol Dhargalkar, managing partner and global head of companies at Chatham Financial Corp. , a company at risk financial advisor. These upgrades often require additional time and money for corporate treasury teams, he said.

Entering into new Libor trades poses financial and potentially other risks to businesses, banks and the market as a whole, said Tom Wipf, head of the Alternative Benchmark Rates Committee, a group of major banks. , insurers and asset managers working on the transition out of Libor. alongside the New York Fed. Liquidity in US Libor-linked markets can only decline over time, Wipf said. Investors define liquidity as the ability to buy and sell securities without significantly changing prices.

“While there is new Libor activity towards the end of the year, SOFR momentum is strong and we expect progress to only accelerate,” said Mr. Wipf, who is also a Morgan Stanley banker.

Many American companies have been slow to move away from Libor. According to LCD, about $ 10 billion in junk food listed business loans sold this year through November have been tied to SOFR, just 1.7% of total sales of $ 595 billion this year.

Walker and Dunlop Inc.

was the first U.S. company to issue a leveraged SOFR bond this year. The commercial real estate finance provider closed in October a $ 600 million loan maturing in 2028 to finance the acquisition of Alliant Capital, a tax services provider, which is expected to close before the end of this quarter.

The loan pays investors an additional yield, or spread, of 2.25% over the SOFR, plus an adjustment of 0.1% to 0.25% depending on the monthly duration. Mitchell Resnick, the company’s senior vice president and treasurer, said creditors have different views on the so-called credit adjustment rate. “It was the most interesting part. It was good to have interesting conversations with the lenders and finally to come to an agreement, ”he said.

The transition from Libor to SOFR was easy for the Bethesda, Md., Based company, Mr. Resnick said, as financial officers were aware of the new benchmark rate due to mortgage activity. Government-controlled mortgage companies Fannie Mae and Freddie Mac moved from Libor to SOFR in 2020.

“SOFR is not something [that is] unusual for us. It seemed like a logical transition, ”Mr. Resnick said. “If you have to explain to people internally what SOFR stands for and how to research it, you’ll have a lot more hesitation about it. “

Write to Mark Maurer at [email protected] and Sebastian Pellejero at [email protected]

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