The rarely spoken secret about the shift away from the U.S. dollar version of LIBOR is that, since banks are no longer the only firms brokering new deals like leveraged loans, LIBOR technically can stay alive.
But some of the biggest private-credit players—who roam outside regulators’ purview on the LIBOR transition—are nonetheless falling in line, issuing new deals tied to the leading U.S. replacement, the Secured Overnight Financing Rate (SOFR).
It’s a sign that regulators largely succeeded in snuffing out LIBOR for new debt offerings after December 31, 2021, a decade after banks were found to have rigged it.
Antares Capital has been underwriting SOFR loans since the beginning of the year. “Antares has worked diligently over the last two years to be operationally prepared to arrange loan transactions and to lend in SOFR, and is currently executing SOFR-based loans,” said Carol Ann Wharton, a spokesperson. “All new direction originations by Antares are being quoted with references to SOFR and not LIBOR.”
Direct lending firm Varagon Capital Partners is also underwriting loans that use SOFR as the benchmark.
“It is expected that SOFR-based originations will continue to gain traction,” Matt Giller, principal at Varagon, said in an email.
See also:
- Are You Ready for the Cessation of USD LIBOR?
- LIBOR’s Final Days Begin with Shakeup to the Swaps Market
- LIBOR Fix Wins House Support
- LIBOR’s Decades-Long Dominance of Rates Is Over
When the Bank of England announced the end of LIBOR several years ago, it sent shockwaves through finance—part relief that the scandal-ridden benchmark would be junked, part uncertainty of what would follow.
Finally, at the beginning of 2022, banks were no longer allowed to issue or arrange new U.S. dollar LIBOR-linked products. But direct lenders—entities outside the banking system, whose assets have collectively swelled to about $1 trillion—are regulated differently. They technically can keep making these loans until the middle of next year, when U.S. LIBOR is due to be fully retired.
But private lenders don’t operate in a vacuum. That’s why they’re adopting SOFR too. They need banks. For instance, banks can help direct lenders fund their deals, and banks might have to stay away if LIBOR is used. And, flush with cash, direct lenders are much bigger players now, meaning they’re increasingly in the big transactions that banks traditionally would’ve gotten. That means playing by the rules.
“There are monetary reasons for direct lenders to make the switch to SOFR,” said Meredith Coffey, executive vice president of research and public policy at the Loan Syndications and Trading Association. “If 2022-originated loans are LIBOR-based, liquidity becomes an issue and selling off a portion of such a loan would be constrained.”
The growth of direct lending has been partly fueled by a regulatory arbitrage that hands private lenders an advantage over banks. But the direct-lending firms have increasingly come to mirror their banking counterparts, whether by providing revolvers or loans above $1 billion.
That also includes weighing up the concerns of the regulators. The U.S. Securities and Exchange Commission (SEC), which oversees direct lenders, has been very supportive of the move to SOFR, and direct lenders likely want to keep them happy.
“Direct lenders don’t want to aggravate the SEC,” said Coffey. “They want to reflect the pricing norms of the broadly syndicated loan market.”
—With assistance from Giulia Morpurgo & Dan Wilchins.
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