Libor replacement reaches Wall Street’s leveraged loan market

Loans to fund buyout of chicken producer Sanderson Farms will be pegged to new Sofr benchmark

Joe Rennison in New York 

Investor appetite will be tested as Bank of America brings to market the first Sofr-based syndicated loan, which will be used to help fund the $4.5bn takeover of Sanderson Farms by Cargill and Continental Grain © AP


Bank of America has started marketing the first leveraged loan tied to the interest rate that is set to replace Libor, in a milestone for the industry as it transitions away from the disgraced lending benchmark.

The US bank has helped tee up a $3.25bn financing package that includes a $750m syndicated loan based on Sofr — the secured overnight financing rate — to fund the $4.5bn takeover of chicken producer Sanderson Farms by Cargill and Continental Grain, according to people involved in the transaction.

The London interbank offered rate, or Libor, has stood for decades as the benchmark for financial markets, including the loan industry. 

But a rate-rigging scandal almost a decade ago tarnished its reputation, leading regulators to call for a replacement. 

The Alternative Reference Rates Committee (ARRC), created by the Federal Reserve, selected Sofr in 2017.

The loan will initially price with an interest rate pegged to Libor, but that rate is set to automatically convert to Sofr on December 31. 

Alongside the syndicated loan, a group of banks led by BofA is also arranging a $750m revolving credit facility and separate bank loans, expected to be pegged to Sofr from their inception, according to a person with knowledge of the financing package.

The deal is being closely followed by participants in the $1.6tn loan market, a critical source of funding for companies and private equity groups looking to finance leveraged buyouts. 

It is likely to be the first of many Sofr-based syndicated loans to hit the market ahead of a year-end deadline, when banks will no longer be able to underwrite loans based on Libor.

The car company Ford is set to secure a revolving credit facility by the end of the month that will also be tied to Sofr, with the credit line coming from a group of banks led by JPMorgan Chase, according to people familiar with the deal. 

The move by Ford was first reported by Bloomberg.

The loan industry has been slow to adopt a replacement to Libor despite the deadline. 

This is in part due to the fact that until recently the industry had not settled on a so-called term rate, which allows companies and traders to agree on interest rates at set dates in the future.

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

Without the understanding of what an interest rate might be several months ahead, companies would be left in the dark as to what they would need to pay each quarter, or half year, in interest.

But in July, the ARRC gave its backing to a forward-looking rate called term-Sofr. The decision paved the way for the loan industry to accelerate the move away from Libor.

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

If it is not possible to use term-Sofr, 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.

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