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Fitch: Syndicated Loan Repricing Likely with LIBOR Phase-Out.

New York: Borrowers and lenders of syndicated loans have been amending their credit documents to include LIBOR replacement language as a result of the rate's anticipated 2021 phase-out, says Fitch Ratings. We believe the replacement language does not effectively address necessary revisions to credit margins despite providing mechanisms to establish a new base rate in place of LIBOR. Unless the LIBOR replacement language is revised, $4 trillion of syndicated loans outstanding that are pegged to LIBOR will likely be repriced if LIBOR is discontinued.

Credit agreements differ as to the degree of consent rights lenders have once the administrative agent and the borrower agree on a revised base rate. Required lenders are often provided negative consent rights to the renegotiated base rate. In such a case, they are given a limited time frame in which they may object to the new rate. If no objection is lodged, the lenders are deemed to have consented to the new rate. Sometimes, required lenders may have additional consultation rights and may be party to the renegotiation itself. However, in the case of The Stars Group (B+/Stable), the administrative agent and the borrower retain the sole right to negotiate a LIBOR replacement and required lenders cannot object to the renegotiated base rate.

As currently drafted, most renegotiation mechanisms do not sufficiently address necessary revisions to credit margins. The Secured Overnight Financing Rate (SOFR) is likely to replace LIBOR in credit agreements. Based on historical data calculated by the Federal Reserve Bank of New York, SOFR may run as much as 75bps below LIBOR due to its secured nature and would necessitate a corresponding hike in credit margins if the originally negotiated pricing on the loan were to be preserved. Indeed, any alternative base rate would compel some revision to the credit margin in order to mirror the LIBOR-based price of the loan. Most credit agreements allow the administrative agent and the borrower to negotiate related changes in addition to a LIBOR replacement. To the extent such related changes are intended to capture changes to the credit margin, the LIBOR replacement language effectively provides that administrative agents and borrowers may simply renegotiate the total price of the loan.

Lenders who retain consent rights may attempt to take advantage of a rising interest rate environment and object to any proposed interest rate that does not reflect the rising market rate. Lenders may even use their carte blanche objection rights as a lever to reprice their loans at a rate higher than such lenders would otherwise be able to receive as a result of an arms-length negotiation process. Conversely, lenders who (as in Stars) do not retain any consent rights are at a considerable disadvantage.

Some credit agreements limit objection rights to newly negotiated rates to only those objections that are made in good faith. Notably, The Good Year Tire & Rubber Co.'s (BB/Stable) second-lien credit agreement, dated March 7, 2018, which allows the administrative agent and the borrower to determine an appropriate reference rate along with "such other related changes," requires that any objection made by required lenders be made in good faith. This arguably prevents lenders from taking advantage of a higher interest rate environment by limiting objections to those that ensure a market rate return.

The Business Loans Working Group of the Alternative Reference Rates Committee is currently considering LIBOR replacement language that may not require renegotiations. In the meantime, however, the renegotiation mechanisms in place necessarily mean loans will be repriced. Repricing may in turn affect a company's cost of debt, which may ultimately implicate credit quality if altered significantly.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Oct 26, 2018
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