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July 2023 | Issue 256
News
Loan market says goodbye to Libor in legacy contracts
Loan market says goodbye to Libor in legacy contracts
Hugh Minch
Senior reporter
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In July, after 37 years of widespread use as the underlying base rate for contracts, the London Inter-Bank Offered Rate will finally be ditched by the majority of the leveraged loan market.
The 30 June deadline for loans to transition to Sofr concludes a five-year period of preparation since the UK’s Financial Conduct Authority announced that Libor would be phased out in 2017.
“Thousands of people have been working on the Libor transition in the loan space since the middle of 2017, so it has been a very long and arduous process,” says Meredith Coffey, executive vice president at the LSTA, who spearheaded the trade association’s Libor transition process. “There was also a lot of education going on as to what the various Sofr rates were, how they differed from Libor and the implications of using them.”
“It has been a very long and arduous process”
Meredith Coffey, Executive vice president | LSTA
44% of the loan market was already referencing Sofr at the end of May, compared to 50% still referencing Libor, according to JP Morgan. However, Coffey says the LSTA estimates that the number of loans that have made the transition is closer to 60% because of amendment fallback activity in recent months.
“Once you’ve amended fallback language, your loan doesn’t reference Sofr until your Libor transition period ends. So if you have a three-month Libor interest contract elected on 31 May and do your amendment on 1 June, you are still paying Libor in June, July and August,” she says.
Coffey adds that at least a further 45% of outstanding Libor loans have a “non-representativeness trigger” that will transition to Sofr on 1 July.
Around 8% of the loan index — mostly consisting of credits issued prior to 2018 — does not have fallback language. Some will likely try and use synthetic Libor, while others are likely to go to prime, which sources say is burdensome for loan issuers.
Beyond the 30 June deadline, the loan market is anticipating continuing challenges resulting from the transition from Libor to Sofr. The LSTA points to the potential of systemic risks resulting from the Kirschner case determining whether term loan Bs are securities, which could see new loans originated as ‘loan style’ 144a notes.
Coffey says the Alternative Reference Rates Committee put out a statement refining the use of term Sofr and said that if loans were 144a placements, they would not be in the ARRC term-Sofr use case.
“In that case, loans might need to use a daily simple or daily compounded Sofr rate, which is very challenging for loans that trade,” Coffey says. “That is not a problem for the coming months but could be in the coming years.”
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Global credit funds & CLO's
July 2023 | Issue 256
Published in London & New York.
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