By Kristen Haunss
NEW YORK (Reuters) - Companies are preparing for a future without a crucial lending benchmark, adding language to their leveraged loan documents that allow them to choose an alternative rate, sometimes without input from lenders.
JDA Software, Surgery Partners and LPL Financial are among companies that have recently added such language. Some of these new provisions have come under lender scrutiny as investors are concerned some terms do not allow them to have input on a feature that could impact their payments.
The US$938bn US leveraged loan market is seeking to build in flexibility following comments in July by Andrew Bailey, chief executive officer of the UK’s Financial Conduct Authority, that a substitute for the London interbank offered rate (Libor) must be in place by the end of 2021. Libor lost credibility as a reference rate for trillions of dollars of investments after an investigation revealed a handful of notable banks had manipulated the rate for profit sharing as far back as 2003.
Set by submissions from banks based on the rate they believe they would be charged to borrow, Libor is a mainstay in the US leveraged loan market where borrowers pay lenders a spread plus the rate. As Libor moves, so do the interest payments investors receive, making discussions about a benchmark change a focus of many.
CHOICES
Following Bailey’s July comments, a handful of companies included language in their credit agreements that allow the agent bank and the borrower to decide on a new alternative rate to Libor.
Many provisions give the majority of lenders the ability to object or consent to the change within a set timeframe if no new widely accepted alternative has been adopted by the market. One recent loan allowed required lenders to choose a new alternative that the agent bank had a right to object to, according to Jenny Warshafsky, a covenant analyst at Xtract Research.
JDA, the supply chain management software company that received an equity injection last year from the Blackstone (NYSE:BX) Group and New Mountain Capital, added language to its recent credit agreement for a US$1.24bn term loan that allows it to change the benchmark with just the approval of the loan’s agent, JP Morgan, according to sources. The language was later tweaked to say that JDA and JP Morgan will give consideration to the “generally accepted” market standard before choosing a replacement. The new language also noted that the all-in applicable rate would not change.
Surgery Partners, a healthcare services provider, included a provision in its credit agreement for a US$1.29bn term loan that stipulates that if a new rate is not already in place, the administrative agent, Jefferies, “from time to time” in consultation with the borrower, may select a new one, according to a regulatory filing.
Broker dealer LPL Financial added language to a loan last month that says if Libor goes away, the administrative agent, JP Morgan, and the company can establish an alternative rate through an amendment, according to a regulatory filing. The amendment will become effective as long as the agent does not receive a written notice from required lenders of each class stating an objection within five business days.
Some investors are concerned these terms can give the borrower too much authority to make changes that could impact interest payments without lender input, the sources said.
Spokespeople for the companies and banks either declined to comment or did not return e-mails and calls requesting comment.
The language in US Collateralized Loan Obligations (CLOs), the largest buyers of leveraged loans, has varied, but a popular option with managers is to include a provision that stipulates the new benchmark is the one identified as the market standard by the US loan trade group, the Loan Syndications and Trading Association, according to investors. This option has yet to show up in loan agreements.
Libor alternative language in credit agreements will continue to evolve as more borrowers seek flexibility, which may eventually lead to a market standard.
“Given that we have time to sort this out, some parties are closing deals with the same language that we have always had,” said Jacob Schtevie, a partner at law firm Winston & Strawn in Chicago. “Other market participants are trying to set a roadmap in their loan agreements for how to fix this issue when it actually arises. It will be interesting to see where the market ends up.”