Loan buyers warned about rush of Sofr opt-in amendments

Sayed Kadiri

Editor

Tanvi Gupta

Head of Data Journalism

CLO managers must be mindful of loan amendments that facilitate a benchmark switch from Libor to Sofr, as they could find themselves buried in paperwork and locked into tight deadlines.

The Loan Syndications and Trading Association has long exhorted investors to ensure they are familiar with fallback language across their loan portfolios, and to look out for early opt-in amendments. Although the primary markets have dried up of late, pent-up demand for loan and CLO paper could cause deal production to start in a flash.

“The message for loan investors is be ready. Amendment requests leave just five days for a response and these could arrive in quick succession,” says Tess Virmani, executive vice president of public policy at the LSTA.

Meredith Coffey, executive vice president of research at the LSTA, says there are three ways in which loan issuers might switch benchmark. They could refinance their debt, use fallback language to switch in June 2023 (the phase-out deadline for Libor), or use fallback language to switch ahead of time.

Early opt-in can take two forms: amendment or hardwired fallback language.

“Amendment requests leave just five days for a response”

Tess Virmani, Executive vice president of public policy | Loan Syndications and Trading Association

“In the ARRC [Alternative Reference Rate Committee] hardwired fallback language, once at least five syndicated deals reference Sofr, if the borrower and agent choose to do so, and the majority of lenders do not object, the loan switches to term Sofr plus ARRC adjustments,” says Coffey.

“Generally, loans that use an ARRC amendment fallback follow a similar process,” she says. “Once the trigger has occurred, the borrower and agent will propose a replacement rate and spread adjustment (likely term Sofr and the ARRC adjustments), and, so long as a majority of the lenders agree within five business days, Libor is replaced with the proposal.”

She adds: “For loans that use a non-ARRC amendment fallback, the language is more variable and lenders should definitely read their documentation closely.”

A US CLO investor says that with just five days to respond to amendments, CLO managers will have to ensure they are set up operationally to deal with this constraint and, at times, work together to block borrower-friendly terms.

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Global credit funds & CLO's

May 2022 | Issue 245

Published in London & New York.