October 5, 2021 - by Meredith Coffey. We had been told that SOFR leveraged loans may emerge rapidly in October and now we may be spotting the tip of the iceberg. Last week, we flagged Sanderson Farms, whose pro rata started out on SOFR and priced with the mechanism of SOFR + ˜11.5 bps spread adjustment + margin. The institutional tranche, meanwhile, started on LIBOR and will switch to SOFR at year-end.
Today, we think the first true US-based BSL institutional SOFR term loan emerged. According to Bloomberg, JPM launched a $600 million TLB for Walker & Dunlop. The loan will be priced as SOFR + 10 bps credit spread adjustment + margin; we believe that the 50 bps floor is tested against the combined SOFR+credit spread adjustment. (This is how the ARRC recommended floors work for LIBOR loans that fall back to SOFR+spread adjustment.)
We are hearing that there will be more October SOFR loans following these. Considering the likely flow of new Term SOFR loans, it is important that buyers prepare in several ways. First, as we have been flagging, it is important to get a CME Term SOFR license. It is free for cash products until the end of 2026, but it still needs to be done. The LSTA flagged the license issue in this write up and CME podcast/slide deck.
Second, buyers need to ensure that they are prepared to have three-field pricing (e.g., SOFR + credit spread adjustment + margin) workable in their system as well as two field-pricing (e.g., LIBOR+margin). The LSTA covered the spread issue in this article and podcast. Vendors have told us that they have built “three-field pricing” into their systems, but it may be necessary for investors to have the most current release.
While market participants may find the new SOFR world daunting, in time it will become the new normal. It’s just time to bite the bullet and get going.