(Bloomberg) – The US leveraged loan market may soon deviate from the proposed London interbank rate on new deals after officials approved a series of forward-looking criteria related to its primary replacement in the US.
According to Meredith Coffey, executive vice president of research and public policy at the US Treasury Department, the Federal Reserve-backed ALRF ratification of the temporary structure for the secured overnight rate should allow bankers and borrowers to start using benchmarks as early as September. Loan syndicated and trade association.
The shift would represent a dramatic change for the more than $ 1 trillion leveraged market that has relied on Libor for decades to support risky floating rate loans that banks make to companies and then distribute to investors. It was one of the last markets to move ahead of the year-end deadline to ditch Libor for new funding sources, with industry observers regularly citing operational concerns about moving from a forward-looking rate like Libor to an overnight rate like SOFR. …
“Both borrowers and lenders are very interested in knowing the rate before the interest period,” said Coffey, noting that the exact time when loans are compared to SOFR depends on when market participants decide to do so. switch.
This year alone, more than $ 337 billion in leveraged loans have been overvalued at Libor, not counting price revisions, although the vast majority contain so-called fallback language that will force them to eventually transition to SOFR as well.
ARRC has approved one, three and six month futures rates based on SOFR CME Group Inc.
“With this move, market participants now have all the tools they need to move away from Libor,” Randal Quarles, deputy chairman of the Federal Reserve Board and chairman of the Financial Stability Board, said in a press statement. “All firms must act quickly to comply with our supervisory directives recommending that they stop using Libor again this year.”
The recommendation came after the completion of key changes to the inter-dealer trade agreements on July 26, the first phase of the SOFR First initiative. Since SOFR is a risk-free rate that tends to trade below Libor, investors may be demanding that new loans using the benchmark come with higher margins, market watchers say.
The SOFR term could also open the door for the rest of the corporate syndicated loan market to accept a new rate, namely revolving lines of credit – loans provided by a group of the company’s banks. They differ in structure from traditional loans because so-called revolvers can be borrowed and repaid over a period of time.
So far, only Ford Motor Co. announced its intention to refinance its revolving credit lines with SOFR.
The SOFR term rate approval could also encourage new CLOs that pack and sell leveraged loans in blocks of varying risk and return to use the new reference rate if the loans they purchase also use the SOFR term, said Coffey, who is also an ARRC member.
CLOs will face a time period where they can be issued at a single rate but will own leveraged loans that use multiple rates, including Libor, SOFR and other alternatives. According to Coffey, holders of CLO stock will eventually take on this underlying risk, which is conceptually similar to the existing inconsistencies between the used terms of the Libor rate.
Apple Inc. is one of the companies that entered the investment grade market on Thursday.
Blackstone Group Inc. teamed up with other lenders to provide $ 2.15 billion in financing directly to Cambium Learning Group Inc., bypassing banks in one of the largest investor loans. The riskiest segment of the high-yield market, the CCC level, is on track to post its first monthly loss since March 2020. The dip would lead to a 15-month positive streak, the longest streak in gains since 1992. High Yield Liquidated Natural Gas Provider Venture Global Calcasieu Pass LLC Sells $ 2.5 Billion Bonds In Two Parts, Up From $ 1.5 Billion
Only one high-yield trade was sold on Thursday as the market enters the summer recession.
Software developer PeopleCert Wisdom Limited sold a 300 million euros ($ 356 million) bond. Credit Suisse was the last European bank to post earnings; The lender posted a Q2 profit that fell short of analyst estimates, adding to concerns with CEO Thomas Gottstein after the Archegos Capital Management and Greensill scandals hit the reputation of Franklin Templeton Bank, which controls $ 1.5 trillion in assets. , bets that ECB policies will not exclude companies that are still moving towards more sustainable models
Yield premiums on Asian dollar bonds fell sharply on Thursday, but that was not enough to induce borrowers to return to the region’s primary debt market.
Spreads narrowed after China made efforts to calm market nerves and the Federal Reserve said it is moving very gradually towards cutting stimulus. The region has seen no major new US currency offerings for the third day in a row, even as financial markets recover from an earlier selloff. Owen Gallimore, head of China’s trade strategy, said in a week boosted by Beijing’s tough crackdown on private businesses in Australia and New Zealand Banking Group
(Updates with information on the SOFR First initiative in the eighth paragraph)
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