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Wednesday, December 1, 2021

The U.S. loan market begins to move away from the impaired Libor benchmark

Companies that borrowed in the US loan market finally got rid of Libor, and just a few months ago, the scandal-hit benchmarks that underpin trillions of dollars in financial instruments will no longer be available for new transactions.

According to data from Refinitiv and LCD, a few companies have now borrowed cash using Sofr, a widely accepted alternative to Libor. Others have new transactions in the market.

Ten years ago, when bankers were found to be manipulating key interest rates, Libor’s reputation was irreparably damaged, so the adoption of Sofr based on market transaction calculations marked an important step in establishing a new standard. Regulators have stipulated that starting from 2022, no new transactions may be linked to Libor, and the benchmark will be phased out before the end of June 2023.

Brian Grabenstein, head of Wells Fargo’s Libor Transition Office, said: “You can’t keep writing Libor loans until December.” “If we had to stop on December 31, then It can’t be business as usual.”

For many years, Libor has been the benchmark for mortgage, credit card, and corporate loan interest rates, so the results of the benchmark reform process will have a wide-ranging impact.

Bankers said that the transformation of the loan market has been slow, partly because the company has no advantage in getting rid of Libor first. Negotiations are still in progress to determine a new agreement for Sofr-related pricing transactions.

Bankers stated that the slow adoption of the so-called regular Sofr interest rate has also hindered progress, which allows companies to plan upcoming interest rate payments by making forward-looking estimates of Sofr’s location. Nevertheless, the urgency of accelerating the adoption of Sofr before the hard stop at the end of the year is growing.

Bank of America brought the first syndicated loan Sofr transaction to poultry producer Sanderson Farms in September. The transaction was priced at Libor, but it was automatically converted to Sofr at the end of the year.

Another major U.S. bank, JP Morgan Chase, subsequently provided Sofr with the first transaction of the commercial real estate finance company Walker & Dunlop from the October issuance time.

Onex Credit Partners manages a package of loans to support the payment of a new portion of debt called mortgage obligations, and brought the first Sofr-related CLO transaction to the market last week.

One aspect that complicates this process is how to explain the fact that Libor interest rates are higher than Sofr. This means that the interest rate of the transaction needs to be adjusted so that the cost of borrowing will eventually be flat when the transaction reaches the new benchmark.

The Committee on Substitution of Reference Rates for Industry Institutions established by the Federal Reserve recommends adjustments of approximately 0.11, 0.26, and 0.43 percentage points for the 1-month, 3-month, and 6-month periods, respectively.

However, some investors said that companies and bankers are taking advantage of strong demand for new loans to lock in low adjustments.

According to people familiar with the matter, this situation was reflected in the Walker & Dunlop transaction, when investors initially rejected the 0.1% adjustment was not enough. JPMorgan Chase finally reached an agreement to appease lenders.

“This is a very hot market,” said Steve Hasnain, PineBridge’s portfolio manager. “This is a borrower market. Lenders cannot push back that much. I think there is some value transfer from lenders to borrowers because of the market we are in.”

Nevertheless, bankers and investors expect that the pace of adoption will continue to accelerate before the end of the year. Kevin Foley, head of global capital markets at JPMorgan Chase, said that all new loan financing, such as mergers and acquisitions underwritten by JPMorgan Chase, will be linked to Sofr if it is expected to be set next year.

Grabenstein added that Wells Fargo did not “completely stop Libor loans, but we will use Sofr to contact customers first, and will only consider using Libor if we really need to use Libor.”

ARRC warned market participants last month not to move their transition from Libor to the last minute. “You won’t wait for a truck to pick up the porcelain; you will carefully pack and label everything beforehand,” said Tom Wipf, chairman of Morgan Stanley ARRC and vice chairman of institutional securities.

Libor vs Sofr

London Interbank Offered Rate It represents the London Interbank Offered Rate and has been one of the most important interest rates in global finance since the 1970s. It was originally designed to estimate the cost of unsecured bank financing to support inter-bank transactions, but as lenders increasingly require collateral to be traded with each other, its usefulness has gradually diminished. According to an opinion submitted by a major lender group, when bankers were discovered to manipulate interest rates, its reputation was damaged, leading to widespread calls for its replacement.

software It is a guaranteed overnight financing interest rate, which is different from Libor because it is based on actual transactions in the repo market, in which cash is borrowed with assets such as treasury bonds. The Substitution Reference Rate Committee, established by the Federal Reserve, selected Sofr as its preferred Libor alternative in 2017, but market adoption was slow before the end of the end of the end of signing new contracts linked to Libor.

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