First Leveraged Term Loan Tied to SOFR

A loan financing the purchase of a chicken processing company is set to be the first in the $1.2 trillion leveraged-loan market to use the Secured Overnight Financing Rate (SOFR) as a benchmark next year, as lenders prepare to ditch the scandal-plagued LIBOR rate.

Wayne Farms’s $750 million loan, which will help fund Cargill Inc. and Continental Grain Co.’s planned acquisition of Sanderson Farms Inc., will initially use LIBOR as a benchmark this year, then automatically switch to SOFR in 2022, according to people familiar with the matter who aren’t authorized to speak publicly.

Regulators had originally expected to phase out the London interbank offered rate (LIBOR) by the end of this year, but then extended that deadline for U.S. dollar LIBOR until mid-2023 for transactions that are sold by the end of this year. Starting next year, new loans can’t be linked to LIBOR.

The Wayne Farms loan is part of a broader financing package that also includes a revolver facility and a term loan A that is not being syndicated to investors. The revolver and term loan A will be priced immediately off SOFR, according to research firm Covenant Review.

Bank of America Corp. began marketing the Wayne Farms loan last week, with commitments due by September 22. Representatives for BofA, Cargill, and Continental Grain declined to comment.

The syndicated corporate loan market, which includes leveraged loans and also revolving credit facilities, has been slow to adopt SOFR. Initially, SOFR could be calculated only as a daily rate, in contrast to LIBOR, which had a wide range of tenors including one, three, and six months.

That lack of a term structure made it difficult for many market participants to switch. But then in July, the Federal Reserve-backed Alternative Reference Rates Committee (ARRC) endorsed one, three, and six-month SOFR rates, making it easier for banks, investors, and companies in more markets to adopt the new benchmark.

Other leveraged loans have been including provisions in their credit agreements that automatically shift the benchmark for pricing to SOFR when U.S. dollar LIBOR is discontinued for existing products in in mid-2023. Some 90 percent of new leveraged loans in August came with what is known as a “hard fallback,” up from 30 percent in December and 60 percent between January and April, according to Covenant Review.

The Financial Times first reported that Wayne Farms’s new loan will automatically convert to SOFR.

For revolving credit facilities, Ford Motor Co. was the first company to announce its intention to use SOFR. The carmaker is marketing a refinancing of three portions of its revolver using SOFR as a benchmark. Commitments are due on Sept. 17. A company can draw down on a revolving line of credit and pay it off repeatedly over time.

—With assistance from Paula Seligson & Bill Shaw.

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