- Leveraged-loan investors won a major concession in the first-ever U.S. deal to fully use the Secured Overnight Financing Rate, a change that lifted their long-run earnings from interest on the transaction, according to a person with knowledge of the matter.
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No What is the Frontline of the U.S.? The loan for Walker Dunlop Inc. is based on SOFR instead of Libor, which has driven the leveraged-loan market for decades. Initially, JPMorgan Chase Co. the lead bank of the real estate deal, offered a 10 basis-point credit spread adjustment, a rate-lifting measure meant to compensate for the fact that SOFR is normally below Libor.
JPMorgan changed that on Thursday. Walker Dunlop's 10 basis point adjustment only applies when Walker Dunlop borrows at a one-month rate. That ratchets up to 15 basis points and 25 basis points, respectively for three - and six-months, according to the person, who asked not to be identified discussing a private transaction.
The change could have broader significance, given JPMorgan's reputation and the fact that this is a trial run for SOFR issuance - potentially setting the template for future deals. Some investors were unhappy that a single adjustment, regardless of tenor, was going to be applied on the Walker Dunlop loan, especially since longer periods of time conventionally lead to larger spreads.
The $600 million loan retained its original 0.5% floor - also known as minimum interest rate - and is still discussed over SOFR at a spread of 250 basis points. One Month, three Month, and six months SOFR are all around 0.05%, making the adjustments most excessive due to the floor more than that level. But a lot of investors will eventually join the Fed and the adjustment would raise equity significantly in the long run.
JPMorgan is also marketing two other SOFR leveraged loans with the 10 basis-point adjustment, which could potentially see changes following Walker Dunlop. Energy company Draslovka Holding and specialty chemicals chemical company Traverse Midstream Partners LLC are selling loans due to wrap-up on Tuesday and Oct. 28, respectively. Both of them have SOFR floors: 1% and 0.75%.
How to use SOFR will be adapted through the leveraged loan ecosystem until the market eventually figures out where to clear these deals, says Tal Reback, president of KKR Co.
That s very healthy and that's why I think ripping off Band-Aid in the fourth quarter allows us to understand how that comes together, she said.
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