Libor substitutes to enter the leveraged loan market on Wall Street

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Libor transition update

Bank of America has begun marketing the first interest rate-linked leveraged loan, which will replace Libor. This is a milestone for the industry to get rid of shameless lending benchmarks.

This U.S. bank helped develop a US$3.25 billion financing plan, including a US$750 million syndicated loan based on Sofr (guaranteed overnight financing rate) to finance US$4.5 billion take over According to those involved in the transaction, Cargill and Continental Grain’s chicken producer Sanderson Farms.

For decades, the London Interbank Offered Rate (Libor) has been the benchmark for financial markets (including the lending industry). But the interest rate manipulation scandal nearly a decade ago tarnished its reputation and caused regulators to request a replacement. The Alternative Reference Rate Committee created by the Federal Reserve chose Sofr in 2017.

The loan will initially be priced at an interest rate linked to Libor, but the interest rate will be automatically converted to Sofr on December 31. In addition to syndicated loans, a group of banks led by Bank of America also arranged a revolving credit facility of US$750 million. According to people familiar with the financing plan, it is expected that a separate bank loan linked to Sofr will be expected from the beginning.

The transaction is being closely watched by participants in the US$1.6 trillion loan market, which is an important source of funds for companies and private equity companies that want to finance leveraged buyouts.It may be the first of many Sofr-based syndicated loans, in Year-end deadlineAt that time, banks will no longer be able to underwrite Libor-based loans.

According to people familiar with the matter, Ford Motor Company will obtain a revolving credit line before the end of this month, which will also be linked to Sofr, and the credit line will come from a group of banks led by JP Morgan Chase.Ford’s move is the first Bloomberg News.

The loan industry has Slow adoption Although there is a year-end deadline, it will still replace Libor. Part of the reason is that until recently the industry has not established a so-called fixed interest rate, which allows companies and traders to agree on interest rates at a set date in the future.

Sofr is based on the daily interest rate of financial market transactions, unlike Libor, which is based on the interest rate submitted by the bank that they think it should be.

Without knowing what interest rates might be in the next few months, companies will have no idea what they need to pay quarterly or half-yearly interest.

But in July, the Substitute Reference Rate Committee provide support The forward-looking interest rate called term-Sofr. This decision paved the way for the loan industry to accelerate its departure from Libor.

According to a report by the research team Covenant Review, the loan provided to Sanderson Farms intends to use term-Sofr at the end of the year if it is “administratively feasible”. The report recently wrote a report on loan details, but did not disclose the specifics. Loan details. The company involved.

If term-Sofr cannot be used, the loan will be restored to the daily Sofr interest rate. Covenant Review declined to comment on the contents of the report.

Bank of America declined to comment. Cargill and Continental Grain did not immediately respond to requests for comment.

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