Yet that may be starting to change.
Investors are increasingly weighing the economics of each offer as the pace of amendments accelerates and the deadline to pivot from LIBOR nears, market watchers say.
“If lenders in fact start paying attention, and blocking the amendments that have either no spread adjustment or lower spread adjustments, then borrowers will have to come back with better terms,” said Ian Walker, a legal analyst at Covenant Review.
In fact, Allied Universal returned to its lenders with a revised amendment earlier this month that included 10 extra basis points, the investors familiar with the transaction said, asking not to be named discussing a private deal. It passed.
Most conflicts, however, aren’t expected to be resolved so quickly.
In September, Petco withdrew an amendment to transition a $1.7 billion loan to SOFR that did not include a credit spread adjustment.
The company only recently brought forward a new amendment proposal that included a credit spread adjustment in line with previous recommendations from officials overseeing the LIBOR transition, people with knowledge of the transaction said.
Those adjustments offer compensation depending on the tenor of the benchmark used to underpin the loan, including 11 basis points for one-month term SOFR and 26 basis points for three-month. The revised proposal also passed.
Representatives for Petco, private equity owner CVC Capital Partners, and agent bank Citigroup Inc. declined to comment.
Dangerous delay
For some, the prospect of prolonged negotiations over credit spread adjustments delaying the shift from LIBOR is adding to concerns over a potential mad rush to amend agreements ahead of the benchmark’s phase-out.
About 80% of the $1.4 trillion US leveraged loan market still needs to pivot to SOFR, according to JPMorgan Chase & Co. data, and there’s already expected to be a significant administrative logjam for borrowers, lenders, lawyers and bankers in the run-up to the deadline.
That could ultimately produce a scenario where some companies aren’t able to transition in time, leading to self-inflicted tumult in the market.
Alternatively, the deluge of amendments could overwhelm lenders and leave them without sufficient time to evaluate each proposal, allowing many to automatically pass, Covenant Review’s Walker said.
Ultimately, both borrowers and lenders should want to shift to SOFR well before the deadline, according to Tal Reback, who leads the LIBOR transition at KKR & Co.
As mid-2023 approaches, LIBOR will become less reliable as activity informing the benchmark dries up further. That increases the risk that the rate could suddenly gap higher or behave in unexpected ways, and poses a bigger problem than a temporary mismatch between CLO assets and liabilities, she noted.
“Liquidity is the Achilles’ heel of the market, so I would want to be where the liquidity is,” Reback said. “And that is undoubtedly SOFR.”
Bloomberg
Source link
