The first broadly syndicated loans (BSLs) priced over the secured overnight funding rate (SOFR) have approached the market, but whether the floodgates installment loans IN open to more loans priced over the Libor-replacement rate remains uncertain. Investors may not even see new collateralized loan obligations (CLO), which purchased 70% of leveraged loans last year, priced over a Libor-replacement rate until well into next year.
Regulators have set a year-end deadline to price all new floating-rate transactions over a Libor-replacement rate, and BSLs priced over SOFR have started to emerge, starting in September with Ford Motor Co.’s massive $15.5 billion refinancing of investment-grade debt.
More pertinent to CLO investors, Wayne Farms launched in September and has successfully syndicated a $750 million leveraged loan with a portion slated for institutional investors that is initially priced over Libor and flips to SOFR next year. This week Walker Dunlop was expected to price a $600 million, seven-year leveraged loan priced over SOFR. And, according to LevFin Insights, two more SOFR-priced loans launched this week: Draslovka Holding A.35 billion repricing.
The large global banks prevalent in the BSL market are paving the way for more non-Libor deals. They expect to offer borrowers a Libor-replacement rate first, starting in the fourth quarter, according to Meredith Coffey, head of research at the Loan Syndications and Trading Association (LSTA), who has heard from members.
“Borrowers can always say, ‘No, I want to do Libor,’ but the first proffer will be a Libor replacement-rate,” Coffey said, adding that most banks have said they will offer SOFR but they could also provide an alternative replacement rate such as the Bloomberg Short-Term Bank Yield Index (BSBY).
As the loan and CLO markets work through them, that effort might delay enthusiastic adoption of them
Whether or not non-Libor pricing snowballs as the year-end deadline approaches, there will be plenty of opportunities given the record volume of loans from borrowers taking advantage of low rates. Expect plenty of demand from the CLO market, which is anticipated to reach record volume this year of at least $150 billion in new issuance, and double that when refinancings and resettings are included.
“Investors are starved for yield, and this is one asset class that continues to offer that yield,” said John Kerschner, head of U.S. securitized products at Janus Henderson Investors, adding that floating-rate CLOs allay concerns about interest rates continuing to rise.
Kerschner noted that the mostly standard documentation for loans priced over Libor-often stretching more than 300 pages-may prompt investors to stick with what they know as they seek to meet their targets by year-end. In addition, some may hesitate taking first-mover risk when there’s little real benefit apart from making headlines.
“But, obviously, we have this deadline, so I expect to see more and more deals coming out over SOFR,” he said. “And by year-end I would expect pretty much all of them to be over SOFR.”
S.’s $350 million term loan B acquisition financing, and a $1
Another issue that could prompt hesitation to price new loans over SOFR-the Libor replacement that the BSL market has adopted so far-stems from the basis difference between risk-free SOFR and Libor, which incorporates lender credit risk. The difference between today’s SOFR and three-month Libor is an historically tight 11 basis points. That compares to a mean basis difference of 26 basis points between the two rates over the last five years, as calculated by the Alternative Reference Rate Committee (ARRC), a private consortium that has overseen the development of SOFR.
Roughly half of loans are structured with a floor, typically resembling Walker Dunlop’s 50-basis-point floor, which provides investors with a minimum return. That neutralizes a future basis adjustment of 26 basis points for those loans, since Libor plus the adjustment will not exceed the floor threshold.