Oct 21, 2021 - Economy

A milestone in ditching Libor

A dollar under a giant magnifying glass.

Illustration: Sarah Grillo/Axios

The bank loan market is in the process of scrapping Libor, the benchmark rate that it’s used seemingly forever. That process was moving along pretty slowly — until now.

What’s new: JPMorgan made the first move in the corporate term loan market, on Friday selling a loan for Walker & Dunlop with an interest rate that’s not pegged to the disgraced Libor.

  • The success of that deal has already opened the door for JPMorgan to bring at least two more loans to market that use a similar interest rate structure, sources tell Axios.

Why it matters: It may sound mundane, but the problem of transitioning from Libor to an alternative benchmark has occupied scores of regulators, bankers and investors for untold hours over the last decade.

  • If implemented sloppily, the process has the potential to create chaos in the corporate and mortgage lending markets — and cost both borrowers and lenders money.

Threat level: Regulators earlier this year set Dec. 31 as the last day that Libor can be referenced in new floating-rate loans, a category that currently includes trillions in debt.

  • Although market participants have known all year that this day was coming, as of a few months ago, little had changed in the institutional loan market — and a handful of alternative rates were fighting for prominence.

State of play: “The Walker & Dunlop deal is a good first step in migrating the markets to the same place,” says Roberta Goss, co-head of the bank loan and CLO platform at Pretium.

How it works: The new Walker & Dunlop loan is tied to the SOFR (secured overnight funding rate) benchmark, an overnight rate. That’s a fundamental difference from Libor, which has a yield curve (more on that here).

The bottom line: “Someone needed to be first. We now have [a structure] … so it's up to the market if this becomes the standard,” a leveraged finance banker tells Axios.

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