US investment groups Jefferies and Antares Capital began offering a $395 million Libor-linked loan to investors Thursday, highlighting the challenges of weaning the financial industry off the moribund interest rate benchmark.
LIBOR, or the London Interbank Offered Rate, took a steady step toward fading out at the end of last year, with regulators stipulating that banks could no longer create new contracts tied to the tainted standard in 2022.
However, the rules only apply to institutions supervised by US banking regulators: the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
Neither Jefferies nor Antares is overseeing those regulators, allowing them to continue printing Libor loans, people familiar with the deal said.
The move exposed a gap in the rules and underlined the challenge of banning LIBOR once and for all.
Nor is it the only part of the loan market that may continue to issue new issues. Direct lending, where a loan is held directly between a company and a lender or a small group of lenders, can still result in LIBOR being minted by non-bank financial institutions.
Libor deals drawn up by banks in 2021 that haven’t hit the market yet could also flow in the first part of this year under rules set by banking regulators. Credit Suisse leads a group of arrangement organizers to market a $180 million loan to TricorBraun, a cover design group associated with Libor. It is also one of the groups involved in the $525 million Libor loan to the Addison Group.
“We are in this gray period. It’s not quite a clean break,” said Jeff Bacallar, head of credit-lending group at FOIA Investment Management, adding that “there will be a bit of slack” until the entire market moves to Sofr, or the secured overnight financing rate, The widely promoted alternative to Libor.
However, bankers and investors said the issuance of Libor is unlikely to last for long, as dependence on the benchmark index wanes.
Bank regulators have set a deadline of mid-2023 to completely eliminate Libor from old and new contracts, aiming to end a nearly decade-long attempt to extract it from the financial system. LIBOR was exposed to a scandal when traders at some of the largest banks were found to have rigged the rate in their favour, nearly 10 years ago.
Trading in Libor is expected to decline, reducing its appeal as a lending standard, even for those who are still allowed to use it. “There are a lot of forces pushing against this long-term trend,” said Meredith Covey, co-chair of public policy at the Confederation of Credit and Trade Unions.
The new Jefferies-Antares loan is for Power Stop, a provider of automotive brake kits backed by investment partners Sterling. Sterling and Powerstop did not respond to requests for comment.
This deal is a first for issuers in the syndicated loan market, where debt-laden companies often raise cash. Power Stop intends to use the fundraising proceeds to refinance existing debt and fund $160 million in profits for its shareholders, people familiar with the deal said.
The loan is marketed to investors at LIBOR plus 4.75 percentage points. That compares to a weighted average return of less than 4 percent on a widely monitored index managed by LSTA.
Jeffries and Antares declined to comment.
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