Title: The Slow Transition from Libor to Sofr: Obstacles and Opportunities
Introduction:
The transitioning from the London Interbank Offered Rate (Libor) to the Secured Overnight Financing Rate (Sofr) has been a long-awaited move in the US financial market. The shift was initiated after the discovery of multiple manipulation scandals following the 2008-09 financial crisis. The transition has progressed slower than expected, with half of the $1.4 trillion Junk Loan Market still pegged to Libor just 30 days before the rate expires. The slow progress raises issues and challenges for corporate borrowers and their institutional facilitators to shift to Sofr and avoid falling back to potentially less favorable loan terms. This article analyzes the obstacles and opportunities of replacing Libor with Sofr in the US financial market.
Obstacles in the Transition Process:
The slow pace of the transition from Libor to Sofr is attributed to a slew of obstacles that hinder the automatic replacement of Libor with Sofr. The following are some barriers impeding the replacement:
1. Little Trading Activity for Junk Loans: One of the primary obstacles of the Libor to Sofr transition is the low level of trading activity holding back companies’ ability to decouple from the loan benchmark and embrace the replacement. New loans in the low-end lending market have been “pretty anemic” this year.
2. Economic and Market Tensions: Time is running out for outstanding debt to reach June 30, with the flow hampered by economic and market tensions. The daily publication of the US dollar version of Libor is seen as the latest obstacle to the move away from the lending rate.
3. Differences Between Old and New Lending Benchmarks: Discussons focused on the differences between the old and new lending benchmarks. Libor is believed to include a built-in credit risk premium that Sofr lacks, prompting lenders to argue that loan modification documents should offer Sofr plus extra compensation.
4. Limited Paperwork: Many companies have backup plans, but these aren’t necessarily attractive options. The natural opportunity to go through a larger transaction actually dried up over the past year, pointing to limited paperwork.
Opportunities in the Transition Process:
Despite the obstacles in replacing Libor with Sofr, there are several opportunities for corporate borrowers and institutions facilitating their transition.
1. Savings on Financing Costs: Companies shifting to Sofr face much lower financing costs compared to the existing rates of Libor. Leveraged loans have variable rates, meaning their coupons soared when the Federal Reserve raised interest rates, resulting in many companies objecting to suggested “credit spread adjustments” that could boost payouts following the switch to Sofr.
2. Better Understanding and Implementation of Sofr: The transitional process is a unique opportunity for companies and their institutional facilitators to understand and implement Sofr, a new benchmark that is expected to replace Libor.
3. Refinancing of Old Loans: In an ideal world, a big chunk of the transition would happen via refinancing, where old Libor-referenced loans are replaced with new ones. A robust primary market environment would have enabled things to happen organically.
Additional Piece:
The shift from Libor to Sofr is a significant change in the US financial market, and the move has raised concerns and opportunities. The replacement of Libor with Sofr has been a long-awaited one due to the multiple manipulation scandals following the 2008-09 financial crisis. Despite the anticipated switch, the transition from Libor to Sofr has been slower than expected, causing panic among market participants. This additional piece will delve deeper into the obstacles and opportunities of replacing Libor with Sofr.
One of the primary obstacles to the ongoing transitional process is the differences between the old and new lending benchmarks. Sofr lacks a built-in credit risk premium included in Libor, thus prompting lenders to argue that loan modification documents should offer Sofr plus extra compensation. This difference in rates accounts for the employers’ slower-than-expected progress, facing a sticking point as they strive to push lending over the threshold before the cap, to avoid automatically falling back to potentially less favorable loan terms.
The shift from Libor to Sofr offers opportunities to both the corporate borrowers and the institutions facilitating their transition processes. The transitional process offers companies an excellent opportunity to understand and implement Sofr, a new lending benchmark. In the transition process, companies can save on financing costs since they face much lower financing costs compared to the existing rates of Libor, resulting in a robust lending environment. Additionally, in an ideal world, a big chunk of the transition would happen via refinancing, where old Libor-referenced loans are replaced with new ones. In such a scenario, the transition would happen organically.
Summary:
The slow pace of the transition from Libor to Sofr has exposed multiple obstacles and opportunities in the US financial market. One of the primary obstacles to the transitional process occurs due to differences between the old and new lending benchmarks. Sofr lacks a built-in credit risk premium included in Libor, prompting lenders to argue that loan modification documents should offer Sofr plus extra compensation. Despite the obstacles impeding the process, the transition offers opportunities to understand and implement Sofr, save on financing costs, and refinance the old loans. In conclusion, the ongoing transitional process is essential in replacing Libor, a variable interest rate that led to numerous manipulation scandals following the financial crisis.
—————————————————-
| Article | Link |
|---|---|
| UK Artful Impressions | Premiere Etsy Store |
| Sponsored Content | View |
| 90’s Rock Band Review | View |
| Ted Lasso’s MacBook Guide | View |
| Nature’s Secret to More Energy | View |
| Ancient Recipe for Weight Loss | View |
| MacBook Air i3 vs i5 | View |
| You Need a VPN in 2023 – Liberty Shield | View |
About half of the $1.4 trillion US junk loan market is still pegged to Libor just 30 days before the rate expires, with little trading activity holding back companies’ ability to decouple from the loan benchmark and embrace it. the replacement.
Slower-than-expected progress means corporate borrowers and the institutions facilitating their transition to the new benchmark face a sticking point as they strive to push lending over the threshold before the cap, to avoid automatically falling back to potentially less. favorable loan terms.
At least $700 billion in low rating business loans they are still valued using Libor, according to industry practitioners’ estimates, despite years of warnings that the rate will cease this summer. Moody’s puts the percentage even higher outstanding, at about 60%, or $900 billion, as of May 19, based on holdings within agency-rated loan portfolios.
The rest of the market has migrated to the new benchmark accepted in the US known as “Sofr”, the guaranteed overnight financing rate and the pace of transition has accelerated in recent months. But time is running out for outstanding debt to reach June 30, with the flow hampered by economic and market tensions.
“I expect everyone across the spectrum – banks, law firms, private equity firms and their portfolio companies – all will be interested and committed to doing what they can to transition their portfolio of operations by the end of the month,” he said. said David Ridley, partner at law firm White & Case, pointing to “a lot of paperwork.”
Meanwhile, new loans in the low-end lending market have been “pretty anemic” this year, according to Lotfi Karoui, chief credit strategist at Goldman Sachs.
“In an ideal world, you want a big chunk of the transition to happen via refinancing where you’re just replacing some of these old Libor-referenced loans with new ones,” Karoui said. “In a more robust primary market environment, things would have happened organically.”
White & Case’s Ridley agrees that “the natural opportunity to go through a larger transaction . . . actually dried up over the past year.”
The end of the daily publication of the US dollar version of Libor is seen as the latest obstacle to the move away from the lending rate, which has been used to value various assets for decades but which was central to the manipulation scandals following the financial crisis of 2008-2009.
The transition to Sofr this year has been slowed down tensions between borrowing companies and their loan holdersmost of which are “covered loan obligations” – vehicles that take loans, categorize them into risk categories, and sell the tranches to investors.
Discussions focused on the differences between the old and new lending benchmarks. Libor is believed to include a built-in credit risk premium that Sofr lacks, prompting lenders to argue that loan modification documents should offer Sofr plus extra compensation.
However, companies are already facing much higher financing costs, because “leveraged loans” typically have variable rates, meaning their coupons soared when the Federal Reserve raised interest rates. In turn, some objected to suggested “credit spread adjustments” that could boost payouts following the switch to Sofr.
But the focus has shifted to getting things done quickly. Many companies have backup plans, but these aren’t necessarily attractive options.
According to the Covenant Review research group’s analysis based on Credit Suisse’s leveraged loan index, more than two-thirds of Libor-linked loans have “hardwired” language in their documents, meaning they will return as of July 1. automatically to the guidelines outlined by the Alternative Reference Rates Committee, a group of market participants convened by the New York Fed.
The ARRC suggests a series of “Sofr plus” adjustments to the loan documentation for various loan periods. Hard-wired borrowers may fall back on those terms, unless they try to make deals with minor adjustments.
Other loans have different types of language to help the transition process. But a smaller cohort – 8% of the Libor-linked market – have no probate language in their records. This means they could revert back to an even more expensive “base rate” if they don’t switch to Sofr in time.
For Tal Reback, principal of the private equity firm KKR which sits on the ARRC board, “it is not a time to panic because the market has proven to be very orderly – given the pace of the amendments in April and May, there there are many.”
But the deeply ingrained nature of Libor after such a long period of use still makes the transition difficult.
“Libor is like salt. It’s in everything – it’s very hard to get off once it’s cooking. But what you’re seeing is a whole new buffet,” he told her.
https://www.ft.com/content/564a9c11-ffaf-484d-9176-20f5b962ee11
—————————————————-