Libor replacement hits Wall Street leveraged loan market

Bank of America has started marketing the first leveraged interest rate loan expected to replace Libor, a milestone for the industry as it moves away from the disgraced lending benchmark.

The American bank helped set up a $ 3.25 billion financial package that includes a syndicated loan of $ 750 million based on the Sofr – the guaranteed overnight funding rate – to finance the Cargill and Continental Grain buy out $ 4.5 billion from chicken farmer Sanderson Farms, according to those involved. in the operation.

The London Interbank Offered Rate, or Libor, has been the benchmark for financial markets, including the lending industry, for decades. But a rate-rigging scandal nearly a decade ago has tarnished its reputation, leading regulators to ask for a replacement. The Alternative Reference Rates Committee (ARRC), created by the Federal Reserve, selected Sofr in 2017.

The loan will initially be fixed at an interest rate indexed to Libor, but this rate is expected to automatically convert to Sofr on December 31. Along with the syndicated loan, a group of banks led by BofA are also organizing a revolving credit facility of $ 750 million and separating bank loans, which should be attached to Sofr upon inception, according to a person familiar with the finance package.

The deal is closely followed by market participants in the $ 1.6 billion loan market, a key source of funding for companies and private equity groups looking to fund debt buyouts. This will likely be the first of Sofr’s many syndicated loans to hit the market before the year-end deadline, when banks will no longer be able to take out Libor-based loans.

Auto maker Ford is expected to secure a revolving credit facility by the end of the month that will also be tied to Sofr, the line of credit from a group of banks led by JPMorgan Chase, people familiar with the deal say. . Ford’s move was the first reported by Bloomberg.

The lending industry has been slow to adopt a replacement for Libor despite the deadline. This is in part because, until recently, the industry had not opted for a so-called forward rate, which allows businesses and traders to agree on interest rates on fixed dates. in the future.

Sofr is a daily interest rate based on transactions in financial markets, unlike Libor, which was based on bank bids of what they thought the rate should be.

Without understanding what an interest rate might be months in advance, companies would be left in the dark about what to pay each quarter, or six months, in interest.

But in July, the ARRC approved a forward-looking rate called Term-Sofr. The decision paved the way for the lending industry to accelerate the abandonment of Libor.

The loan to Sanderson Farms intends to use the term-Sofr if “administratively feasible” when the conversion takes place at the end of the year, according to a report by the Covenant Review research group, which recently wrote on loan details without naming the company involved.

If it is not possible to use the Sofr term, then the loan will revert to the daily Sofr rate. Covenant Review declined to comment beyond the content of the report.

BofA declined to comment. Cargill and Continental Grain did not immediately respond to requests for comment.

Priscilla C. Carnegie