Libor Transition Updates
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Bank of America has begun marketing the first leveraged loan linked to the interest rate that Libor will replace, in a milestone for the industry as it transcends the undeniable lending benchmark.
The US bank helped draft a $ 3.25 billion financing package that includes a $ 750 million syndicated loan, based on Sofr – the safe overnight financing rate – to finance the $ 4.5 billion take over of chicken producer Sanderson Farms by Cargill and Continental Grain, according to people involved in the deal.
The London interbank rate, or Libor, has been the benchmark for financial markets, including the lending industry, for decades. But an interest rate scandal nearly a decade ago tarnished its reputation, prompting regulators to replace it. The committee for alternative reference prices, set up by the Federal Reserve, elected Sofr in 2017.
The loan will initially be priced at an interest rate linked to Libor, but the rate will be automatically converted to Sofr on 31 December, along with a syndicated loan, a group of banks led by Bank of America will also arrange a revolving credit facility of $ 750 million. and separate bank loans, which are expected to be linked to Sofr from the outset, according to a person with knowledge of the financing package.
The transaction is now being followed by participants in the $ 1.6 tonne loan market, a critical source of funding for businesses and private equity firms seeking to finance leverage. This is probably the first of many Sofr – based syndicated loans to reach the market before a end of the year, when banks will no longer be able to underwrite Libor-based loans.
The car company Ford will acquire a revolving credit facility by the end of the month, which will also be linked to Sofr, and the credit line will come from a group of banks led by JPMorgan Chase, according to people familiar with the transaction. The step by Ford was first reported Bloomberg.
The loan industry was slow to accept a replacement for Libor despite the deadline for the end of the year. This is partly due to the fact that until recently the industry has not yet decided on a so-called forward rate, which will allow companies and traders to agree on interest rates on the set dates in the future.
Sofr is a daily interest rate based on transactions in financial markets, as opposed to Libor, which was based on bank submissions of what they think the rate should be.
Without understanding what an interest rate could be a few months ahead, companies will remain in the dark about what they will have to pay in interest each quarter, or half a year.
But in July, the committee for alternative reference prices given his support at a forward-looking rate called term-Sofr. The decision paved the way for the lending industry to accelerate the move away from Libor.
The loan to Sanderson Farms plans to use term-Sofr if it is “administratively feasible” when the conversion takes place at the end of the year, according to a report by research group Covenant Review, which recently reviewed the details of the loan wrote without the company concerned.
If it is not possible to use term Sofr, the loan will return to the daily Sofr rate. Covenant Review declined to comment further than the content of the report.
Bank of America declined to comment. Cargill and Continental Grain did not immediately respond to requests for comment.