The Libor scandal has caused a flood of bad news for major financial institutions, but banks are still clinging to the benchmark interest rate as their last line of defense against regulators.
The “libor rate” is a key deadline for the companies that are struggling with their finances. The “libor rate” is due to be released on September 18th, but some companies are still clinging to the old system.
By the end of December, US corporations must abandon the London interbank offered rate for new financing. Before then, many people want to clinch one more transaction.
Libor, which supports billions of dollars in business loans, derivatives, and house mortgages, will be unable to issue new loans or other financial contracts as of January 1. They will, however, be permitted to use Libor for debt issued before the end of the year until June 2023.
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Libor was phased out by financial regulators in 2017 after traders at big banks manipulated the rate by providing bogus data. Banks were fined billions of dollars, and some traders were sentenced to jail as a result.
Regulators have been putting growing pressure on lenders to reduce their own and their customers’ exposure to Libor. Even yet, companies including consumer-credit behemoth TransUnion LLC, crane-components manufacturer Columbus McKinnon Corp., and sports-apparel retailer Fanatics Inc. have announced new leveraged-loan transactions utilizing Libor in recent weeks.
According to executives, attorneys, and counselors, Libor, which goes back to 1986, remains appealing to corporations for a number of reasons, including advantageous rates and familiarity with its behavior. According to them, executives have become used to utilizing Libor.
Low interest rates and strong investor demand for greater fixed-income returns have resulted in record sales of riskier corporate debt connected to Libor, such as leveraged loans, which are used by private equity firms to fund business buyouts. According to S&P Global Market Intelligence’s LCD, a data source, total leveraged-loan sales had already established an annual record in 2021, totaling over $585 billion through November, up from $288 billion the previous year.
TransUnion, located in Chicago, utilized Libor to assist fund the purchases of Neustar Inc., a provider of information services, and Sontiq, a provider of digital identity security, both of which concluded on December 1. According to TransUnion, a $3.1 billion loan will expire in 2028, while a $640 million loan has an eight-year tenure. As the June 2023 deadline approaches, the corporation will have to make revisions to the rate indicated in its loans.
According to analysts and executives, many corporations expect to migrate to the Secured Overnight Financing Rate, or SOFR, which is the favored Libor substitute by US regulators and Wall Street. Others are considering credit-sensitive alternatives like the Bloomberg Short Term Bank Yield Index and Ameribor, which represent lenders’ financing costs and resemble Libor.
TransUnion LLC’s CFO, Todd Cello
TransUnion LLC (photo)
“We have the option of using SOFR or other benchmarks if Libor is no longer accessible,” TransUnion Chief Financial Officer Todd Cello stated.
Columbus McKinnon has secured a $75 million loan with a 2028 maturity date to fund its acquisition of Garvey Corp., a manufacturer of industrial gear. Chief Financial Officer Gregory Rustowicz said the firm chose Libor because it didn’t want to change the wording in its current loan arrangement, which would have needed consent from its creditors.
“It was easier to keep rolling with Libor,” he said.
Mr. Rustowicz intends to revise the firm’s credit arrangement before the 2023 deadline, and the next time his company has to refinance debt, he hopes to replace Libor with SOFR.
Due to the difference in spread between Libor and SOFR, Fanatics Inc. likely saved money by utilizing Libor for a $500 million leveraged loan it acquired last month, according to CFO Glenn Schiffman. The privately owned firm from Jacksonville, Fla., completed the purchase to diversify its financing sources and spend more in its web platform, he added. The loan includes backup arrangements for switching to SOFR in the future.
According to David Duffee, partner at law firm Mayer Brown LLP, a lack of expertise with the replacement rates is encouraging some corporations to complete one final Libor-related transaction before the end of the year. “Companies are well aware that this is their last obvious opportunity to do anything Libor-priced,” he added.
According to Amol Dhargalkar, managing partner and worldwide head of corporates at Chatham Financial Corp., most organizations would have to adapt their systems to handle compounded-interest computations since they weren’t required on a regular basis prior to SOFR. According to him, these modifications typically need more time and money for company finance departments.
According to Tom Wipf, head of the Alternative Reference Rates Committee, a group of major banks, insurers, and asset managers working alongside the New York Fed on the transition away from Libor, closing new Libor deals poses financial and potentially other risks for companies, banks, and the market as a whole. Mr. Wipf believes that liquidity in US Libor-linked markets would deteriorate over time. Liquidity is defined by investors as the ability to acquire and sell securities without major price changes.
“While there will be some fresh Libor activity towards the end of the year, the momentum towards SOFR is strong, and we anticipate development to only accelerate,” said Mr. Wipf, a Morgan Stanley banker.
Many American businesses have been slow to move away from Libor. According to LCD, just $10 billion in junk-rated corporate loans were offered this year through November, accounting for barely 1.7 percent of the $595 billion in total sales.
This year, Walker & Dunlop Inc. was the first corporation in the United States to provide a leveraged loan related to SOFR. The commercial real-estate financing company took on a $600 million loan due 2028 in October to fund the purchase of tax-services provider Alliant Capital, which is anticipated to conclude before the end of the quarter.
The loan offers investors a 2.25 percent higher return, or spread, above SOFR, plus a monthly term adjustment of 0.1 percent to 0.25 percent. Creditors have differing perspectives on the so-called credit adjustment rate, according to Mitchell Resnick, the company’s senior vice president and treasurer. “That was the most intriguing element of the whole thing.” It was satisfying to have lively discussions with lenders and finally reach an arrangement,” he remarked.
Mr. Resnick said the switch from Libor to SOFR was simple for the Bethesda, Md.-based firm since finance employees were already aware with the new reference rate from their work in the mortgage industry. Fannie Mae and Freddie Mac, two government-controlled mortgage businesses, moved from Libor to SOFR in 2020.
“To us, SOFR is nothing out of the ordinary. Mr. Resnick said, “It felt like a reasonable progression.” “If you have to explain what SOFR stands for and how to look it up internally, you’ll encounter a lot more resistance.”
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