Industry participants estimate only about 25 per cent of the US$1.4-trillion U.S. ‘junk’ loan market has switched to Libor’s replacement, known as SOFR, ahead of the June 30 deadline
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With time ticking, the terms of some loans would mean a shift to more punitive rates if a solution cannot be agreed upon. Others would revert to the lower SOFR rate, but with an adjustment to stop investors from being left out of pocket. Borrowers and lenders have been left to wrangle over how large this extra “spread” should be, loan by loan.
Leveraged loans, which are usually sold by low-rated companies with high levels of debt, are a crucial battleground partly because of the speed with which they have proliferated over the past decade as companies and private-equity backers took advantage of the cheap money era to fuel a dealmaking frenzy. In 2021, U.S. issuance totalled US$615-billion, up from US$289-billion a year earlier, according to data from LCD.
Holders of collateralized loan obligations – vehicles backed by bundles of loans that have hoovered up about two-thirds of the leveraged loan market – are pushing for more favourable terms. They’re demanding an additional “credit spread adjustment” in updated LIBOR-based contracts to compensate for the lower SOFR rate. But many corporate borrowers and their private equity backers want smaller spread adjustments to keep down their interest costs.
“There have been different opinions as to what the [adjustment in the rate] should or shouldn’t be for loans that are transitioning from LIBOR to SOFR,” says Adrienne Butler, head of U.S. CLO funds at Barings LLC. But the scale of the remaining task means that a last-minute scramble by companies, investors and their lawyers to strike a deal is likely before the deadline.
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