JPMorgan Sweetens Debut SOFR Loan After Investors Balk

(Bloomberg) -- Leveraged-loan investors won a major concession in the first-ever U.S. deal to fully use the Secured Overnight Financing Rate, a change boosting their long-run earnings from interest on the transaction, according to a person with knowledge of the matter.

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 on the real estate lender’s deal, offered a 10-basis-point credit spread adjustment, a rate-lifting measure meant to compensate for the fact that SOFR is usually below Libor.

JPMorgan changed that on Thursday. Now, the 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 broad significance, given JPMorgan’s clout 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 to the Walker & Dunlop loan, especially since longer periods of time conventionally lead to larger spreads. 

JPMorgan is marketing two other SOFR leveraged loans with the 10-basis-point adjustment, which will see the same changes as Walker & Dunlop’s deal, according to a different person with knowledge of the matter. Energy company Traverse Midstream Partners LLC and specialty chemicals company Draslovka Holding are selling loans due to wrap up on Tuesday and Oct. 28, respectively. Both have SOFR floors: 1% and 0.75%.

The $600 million Walker & Dunlop loan retained its original 0.5% floor -- aka a minimum interest rate -- and it’s still being discussed at a spread of 250 basis points over SOFR, the person familiar with the matter said. One-month, three-month, and six-month term SOFR all stand at about 0.05%, making the adjustments currently moot, because the floor more than exceeds that level. But eventually rates will rise, and the adjustment could win investors significantly more interest in the long-run.

Meanwhile, regulators are calling out the loan market for not leaving Libor behind fast enough. While there are positive signs of progress in the transition, “progress needs to accelerate,” Lorie Logan, a New York Federal Reserve executive vice president, said Thursday. She noted that there’s only 79 days until newly issued financial products like leveraged loans can no longer be tied to Libor.

How to use SOFR will be digested through the leveraged loan ecosystem until the market eventually figures out where to clear these deals, said Tal Reback, principal at KKR & Co.

“That’s very healthy, and that’s why I think ripping the Band-Aid off now in the fourth quarter allows us to understand how that comes together,” she said.

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