SOFR Libor is a forward-looking rate. Desirable for many borrowers but there are also challenges. Asia Pacific is working in the standardized Libor with overnight rates. A Singapore-based senior banker said that the challenge could be in the more market standard that could be hedged. In this case, they have to wait until it is close to the interest period payment date.
Asian borrowers have a strong preference for the term SOFR. Based on a research done by APLMA survey, around 48% of the respondents prefer the term SOFR. Meanwhile, the 33/5 named SOFR compounded in the preferred methodology. The rest 2% preferred daily simple SOFR. Then, one-fifth of the survey said that they do not use the term SOFR at all on new U.S. dollar loans, said IFR Asia.
As a result, Asia has closed a couple of term SOFR loans recently. It includes a $957m five-year loan for private equity giant Blackstone Group. It is in the form of leveraged buyout of Singapore-based Interplex Holdings. Around two dozen lenders join this general syndication.
Others included a $330m five-year facility backing CVC Capital Partners’ LBO of Sajjan India. The firm has attracted around 14 lenders in syndication. Then the $166m five-year facility backed Advent International’s refinancing of portfolio company Manjushree Technopack’s debt. The debt closed with seven participations.
Another issue would be the calculation methodology for the credit adjustment spread. This scenario is to compensate lenders for the difference between Libor and new risk-free rates such as SOFR. Previously, it traded at a discount to Libor. Lenders could manage potential funding mismatches using this scheme. But there are uncertainties over the use of CAS in loans. So, some borrowings prefer flat CAS while others incorporate the spread into the margin.
