June 21, 2023 - With just a few days before the end of USD Panel LIBOR, where does LIBOR transition stand – and what are the companies that haven’t converted to SOFR thinking?
First, where are we in LIBOR transition? According to the JPM SOFR transition update, roughly 44% of the loans in the JPM Loan Index were referencing SOFR at the end of May. But we’re further along. First, there are reporting lags. Second, while a loan might have completed a LIBOR fallback amendment, it will not reference SOFR until the current (1M/3M/6M) interest contract ends and a new (SOFR) contract begins. JPM reports that, of the loans in the Index not using SOFR, 64% are using 1M LIBOR and 33% are using 3M LIBOR (with a handful on 6M and 12M LIBOR). If we apply these shares to the $440 billion-plus of amendment fallbacks tracked by LFI since March, we estimate that roughly 65% of outstanding loans have transitioned…even if a number still are paying LIBOR.
So, what happens to those loans that haven’t transitioned. First, according to Covenant Review, approximately 36% of the LIBOR loans in the CS Index have hardwired fallback language and another 11% have ARRC amendment fallback language; these loans will begin the transition upon panel LIBOR cessation (and LIBOR non-representativeness) on June 30th. Of the remaining LIBOR loans, some companies may have selected a longer LIBOR period to buy more time to transition, some others might go to synthetic LIBOR if they can (particularly if they plan to refinance in the near term) and some may fall back to Prime for a period of time. At the end of the day, there will be some scrambling and messiness, but we believe nearly everyone should have a place to go.