{"id":46501,"date":"2023-01-03T05:42:22","date_gmt":"2023-01-03T10:42:22","guid":{"rendered":"https:\/\/www.bloomberg.com\/professional\/insights\/trading\/debt-investors-losing-millions-on-libor-switch-start-to-fight-back\/"},"modified":"2024-04-24T14:35:27","modified_gmt":"2024-04-24T18:35:27","slug":"debt-investors-losing-millions-on-libor-switch-start-to-fight-back","status":"publish","type":[3762],"link":"https:\/\/www.bloomberg.com\/professional\/insights\/trading\/debt-investors-losing-millions-on-libor-switch-start-to-fight-back\/","title":{"rendered":"Debt investors losing millions on LIBOR switch start to fight back"},"content":{"rendered":"<div  class=\"bbg-row-container\">\n    <style>section[data-anchor=row-69fde6d030f4a]::before {\n\t\t\t\tbackground-color: #eeeeee;\n\t\t\t}<\/style>\n    <section class=\"bbg-row bg--custom-color  bg--eeeeee text--black bbg-row--full-bg-bleed\" data-anchor='row-69fde6d030f4a'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8 bbg-column--valign-bottom\"\n    style=\"\"\n    >\n    <p>    <ul class=\"bbg-categories_list\">\n                    <li>\n                <a href=\"https:\/\/www.bloomberg.com\/professional\/insights\/category\/markets\/\" rel=\"category tag\">\n                    Markets\n                <\/a>\n            <\/li>\n                    <li>\n                <a href=\"https:\/\/www.bloomberg.com\/professional\/insights\/category\/regulation\/\" rel=\"category tag\">\n                    Regulation\n                <\/a>\n            <\/li>\n                    <li>\n                <a href=\"https:\/\/www.bloomberg.com\/professional\/insights\/category\/risk\/\" rel=\"category tag\">\n                    Risk\n                <\/a>\n            <\/li>\n                    <li>\n                <a href=\"https:\/\/www.bloomberg.com\/professional\/insights\/category\/trading\/\" rel=\"category tag\">\n                    Trading\n                <\/a>\n            <\/li>\n            <\/ul>\n<div\n    class=\"bbg-spacer\"\n        style=\"height: 24px !important\"\n    >\n<\/div>    <h1 class=\"bbg-metadata bbg-metadata--title\">Debt investors losing millions on LIBOR switch start to fight back<\/h1>\n<\/p>\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <section class=\"bbg-row  text--black row-padding--top-compact row-padding--bottom-none bbg-row--full-bg-bleed\" data-anchor='row-69fde6d0386d7'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8\"\n    style=\"\"\n    >\n    <p><div\n    class=\"bbg-spacer\"\n        style=\"height: 40px !important\"\n    >\n<\/div><div\n\tclass=\"bb-wysiwyg byline\"\n\t\t>\n\t<p><strong>Bloomberg News<\/strong><\/p>\n\n<\/div>\n    <p class=\"bbg-metadata bbg-metadata--date\">January 3, 2023<\/p>\n<\/p>\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <section class=\"bbg-row  text--black row-padding--top-none bbg-row--full-bg-bleed\" data-anchor='row-69fde6d03aa71'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8\"\n    style=\"\"\n    >\n    <p><div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p><em>This article was written by Paula Seligson with assistance from Lisa Lee. It appeared first on the Bloomberg Terminal.<\/em><\/p>\n<ul>\n<li>Borrowers offer loan amendments not accounting for lower SOFR<\/li>\n<li>Investors begin to reject proposals amid mounting frustration<\/li>\n<\/ul>\n<p>The request from Allied Universal to its lenders last month seemed innocuous and logical enough.<\/p>\n<p>With the deadline rapidly approaching to phase out LIBOR as the benchmark for trillions of dollars of floating-rate debt, the provider of security guards and janitors wanted to start using a replacement to set the rate on more than $4 billion of loans. Under the terms of its credit agreement, the company didn\u2019t even need its debtholders to formally sign off on the plan \u2014 it just needed more than half of them to refrain from objecting.<\/p>\n<p>It couldn\u2019t even manage that.<\/p>\n<p>The surprise repudiation by Allied Universal\u2019s creditors was the culmination of months of brewing frustration over what\u2019s seen as a growing effort by some borrowers to use the transition to a new reference rate to stealthily tilt the economics of deals in their favor, according to multiple investors and market participants.<\/p>\n<p>By offering terms that don\u2019t compensate lenders for the fact that the alternative benchmark \u2014 the Secured Overnight Financing Rate \u2014 consistently prints below LIBOR, companies have been able to reap significant savings. With roughly 80% of the US leveraged loan market still needing to make the switch, the value of interest payments on more than $1 trillion of debt is at stake ahead of the much-maligned reference rate\u2019s phase out mid-next year.<\/p>\n\n<\/div>\n<div class=\"bbg-interstitial\" aria-label=\"interstitial\" tabindex=\"0\">\n\t<style>\n\t\t.bbg-interstitial #card_1.bbg-card_hasCta{\n\t\t\tbackground:rgba(0,0,0,0);\n\t\t\tpadding: 104px;\n\t\t\t\n\t\t\t\n\t\t}\n\t\t.bbg-interstitial #card_1.bbg-card_hasCta .bbg-card__content, .bbg-interstitial #card_1.bbg-card_hasCta .bbg-card__content p{\n\t\t\tcolor:inherit;\n\t\t}\n\t\t@media (max-width: 768px) {\n\t\t\t.bbg-interstitial #card_1.bbg-card_hasCta{\n\t\t\t\tpadding: 80px 32px;\n\t\t\t}\n\t\t}\n\t\t@media (max-width: 480px) {\n\t\t\t.bbg-interstitial #card_1.bbg-card_hasCta{\n\t\t\t\tpadding: 80px 18px;\n\t\t\t}\n\t\t}\n\t<\/style>\n\t<div class=\"wpb_content_element bbg-card  bbg-card-dark bbg-card_hasCta has_interstitial\" id=\"card_1\" data-card_type=\"no_image\">\n  \n  \n  <div class=\"bbg-card__innerwrapper\">\n    <div class=\"bbg-card__content\">\n      \n      \n                      <h3 class=\"bbg-card__title\">Ease the LIBOR transition<\/h3>\n      \n              <div class=\"bbg-card__wysiwyg bb-wysiwyg\"><p>Access a comprehensive suite of data, analytics and portfolio solutions<\/p>\n<\/div>\n          <\/div>\n\n          \n<div\n  id=\"cta_286143682786730495\"\n  class=\"wpb_content_element bbg-cta icon icon-arrow\">\n  <style>\n    \n    \n    \n  <\/style>\n  <div\n    class=\"bbg-cta-link link-holder\"\n    data-links-type=\"cta-links\">\n    <p class=\"bbg-cta-p right\">\n      <a\n        class=\"bbg-cta-link link interstitial_cta\"\n        href=\"https:\/\/www.bloomberg.com\/professional\/solution\/libor-transition\/\"\n        target=\"_blank\"\n        rel=\"\"\n        data-section-name=\"\"\n                role=\"button\"\n        aria-label=\"Learn more\"\n        >\n                <\/a>\n    <\/p>\n  <\/div>\n<\/div>\n\n      <\/div>\n\n  <\/div>\n\n<\/div>\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p>\u201cAlmost all of these types of amendments are getting done at an economic benefit to companies and a cost to lenders,\u201d said Scott Macklin, director of leveraged loans at AllianceBernstein. \u201cCompanies have all the incentives in the world to continue to accelerate the process of transitioning from LIBOR to SOFR if lenders continue to allow them to save money doing so.\u201d<\/p>\n<p>A representative for Allied Universal didn\u2019t respond to requests for comment, while representatives for Credit Suisse Group AG, the agent bank on the loan, and Warburg Pincus, the company\u2019s private equity owner, declined to comment.<\/p>\n\n<\/div>\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<h3 style=\"text-align: center\"><strong>Moving target<\/strong><br \/>\nThe difference between LIBOR and SOFR varies over time<\/h3>\n\n<\/div>\n<div id=\"\" class=\"wpb_content_element bbg-single-image align-center\">\n    <figure class=\"bbg-single-image__figure\" style=\"max-width:1024px\">\n                <img loading=\"lazy\" decoding=\"async\" width=\"800\" height=\"395\" src=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Moving-Target.jpg\" class=\"bbg-single-image__image attachment-large\" alt=\"LIBOR and SOFR\" title=\"Moving-Target-LIBOR-SOFR\" srcset=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Moving-Target.jpg 800w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Moving-Target.jpg 552w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Moving-Target.jpg 768w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Moving-Target.jpg 600w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Moving-Target.jpg 1079w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/>\n        \n            <\/figure>\n<\/div>\n\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p>Recent clashes over how much investors should get paid when borrowers switch to a new benchmark are a small part of a much larger struggle by global regulators to shift markets away from the scandal-tainted London interbank offered rate.<\/p>\n<p>LIBOR was once the go-to reference rate for everything from student loans and mortgages to eurodollar futures. But as markets evolved, the trading that helped inform the benchmark dried up, and the rate was found to be routinely manipulated by big banks.<\/p>\n<p>Until this year, virtually the entire leveraged loan market was tied to the floating benchmark. US officials banned new loans from using LIBOR in January, but gave existing contracts until the end of June 2023 to ditch it.<\/p>\n<p>Yet SOFR, LIBOR\u2019s replacement in the US, has proven an imperfect alternative. Since the start of the year, three-month term SOFR has printed anywhere from 8 to 43 basis points below LIBOR. CLOs, or collateralized loan obligations, are particularly vulnerable to the risk of a mismatch between rates on the loans they buy and the bonds they sell to investors.<\/p>\n<p>That\u2019s set the stage for borrowers and lenders to haggle over how to make up a gap of more than $1 billion in annual interest payments.<\/p>\n<h2>Benchmark battle<\/h2>\n<p>While Allied Universal\u2019s proposal was one of the first benchmark amendments to be shot down by investors, many say it won\u2019t be the last.<\/p>\n<p>Companies are grappling with the fastest monetary policy tightening in decades as the Federal Reserve raises interest rates to tame runaway inflation. That\u2019s left highly-indebted firms dealing with a spike in their borrowing costs that\u2019s hurting cash flow just as a potential recession looms. While some borrowers had already sought to skip on so-called credit spread adjustments earlier in the year before rates took off, for many, leaving them out has now become a way to try and chip away at that extra interest burden.<\/p>\n<p>For months, lenders largely let them get away with it. The reasons varied. Opinions differed among investors on which deals were worth fighting over, and some saw diminishing returns from quibbling over a few basis points when the Fed was jacking up rates.<\/p>\n<p>Moreover, they simply weren\u2019t organized enough to block the proposals, especially those tied to loans with so-called negative consent clauses, which comprise about 30% of the market, according to Covenant Review data. Those clauses, which Allied Universal had, require more than half of creditors to actively vote to reject amendments, in contrast to a typical loan where debtholders must vote yes for an amendment to pass.<\/p>\n\n<\/div>\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<h3 style=\"text-align: center\"><strong>LIBOR amendments pick up pace<br \/>\n<\/strong>Amendments to transition leveraged loans from LIBOR to SOFR increased<\/h3>\n\n<\/div>\n<div id=\"\" class=\"wpb_content_element bbg-single-image align-center\">\n    <figure class=\"bbg-single-image__figure\" style=\"max-width:1024px\">\n                <img loading=\"lazy\" decoding=\"async\" width=\"730\" height=\"473\" src=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Covenant-review.jpg\" class=\"bbg-single-image__image attachment-large\" alt=\"Covenant review\" title=\"Covenant-review\" srcset=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Covenant-review.jpg 730w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Covenant-review.jpg 552w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/Covenant-review.jpg 600w\" sizes=\"auto, (max-width: 730px) 100vw, 730px\" \/>\n        \n            <\/figure>\n<\/div>\n\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p>Yet that may be starting to change.<\/p>\n<p>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.<\/p>\n<p>\u201cIf 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,\u201d said Ian Walker, a legal analyst at Covenant Review.<\/p>\n<p>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.<\/p>\n<p>Most conflicts, however, aren\u2019t expected to be resolved so quickly.<\/p>\n<p>In September, Petco withdrew an amendment to transition a $1.7 billion loan to SOFR that did not include a credit spread adjustment.<\/p>\n<p>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.<\/p>\n<p>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.<\/p>\n<p>Representatives for Petco, private equity owner CVC Capital Partners, and agent bank Citigroup Inc. declined to comment.<\/p>\n<h2>Dangerous delay<\/h2>\n<p>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\u2019s phase-out.<\/p>\n<p>About 80% of the $1.4 trillion US leveraged loan market still needs to pivot to SOFR, according to JPMorgan Chase &amp; Co. data, and there\u2019s already expected to be a significant administrative logjam for borrowers, lenders, lawyers and bankers in the run-up to the deadline.<\/p>\n<p>That could ultimately produce a scenario where some companies aren\u2019t able to transition in time, leading to self-inflicted tumult in the market.<\/p>\n<p>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\u2019s Walker said.<\/p>\n<p>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 &amp; Co.<\/p>\n<p>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.<\/p>\n<p>\u201cLiquidity is the Achilles\u2019 heel of the market, so I would want to be where the liquidity is,\u201d Reback said. \u201cAnd that is undoubtedly SOFR.\u201d<\/p>\n\n<\/div>\n\n<\/div><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <style>section[data-anchor=row-69fde6d046ee8]::before {\n\t\t\t\tbackground-color: #eeeeee;\n\t\t\t}<\/style>\n    <section class=\"bbg-row bg--custom-color  bg--eeeeee text--black bbg-row--full-bg-bleed\" data-anchor='row-69fde6d046ee8'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <div\n    class=\"bbg-column\"\n    style=\"\"\n    >\n    <div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<h2>Recommended for you<\/h2>\n\n<\/div>\n<div\n    class=\"bbg-spacer\"\n        style=\"height: 24px !important\"\n    >\n<\/div><script>\n    window.feed = window.feed || {};\n    window.feed['69fde6d0497c6'] = 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