| NEW YORK, April 12
NEW YORK, April 12 Staffing company On
Assignment is one of many US borrowers that have taken the
opportunity of a leveraged loan refinancing to remove an
unwanted ‘Libor floor,’ which artificially increases their
Leveraged loans typically pay an interest margin plus Libor,
but Libor floors were added during the financial crisis to
guarantee minimum yields for investors after Libor rates
Robust loan market conditions and higher Libor rates since
the start of 2016 mean that Libor floors are no longer required.
Companies are choosing to remove them or set the rate at zero
while investor demand for floating-rate loans remains strong in
a rising interest rate environment.
In the first quarter, 24% of companies either issued loans
without Libor floors or set the rate at 0%, compared to only 10%
a year earlier, according to LPC data.
“Libor floors made their way into the market during the last
down cycle in order to entice investors to buy leverage loans,”
said Enam Hoque, a senior covenant officer at Moody’s Investors
Service. “There’s really no need to entice investors any
On Assignment was able to remove a 75bp Libor floor when it
refinanced an existing loan in February and cut 50bp off its
interest margin to 225bp over Libor, according to Thomson
Reuters LPC data.
“Any time you can do a repricing, you’d like to get the most
beneficial terms you can and so to the extent the market allows
you to remove the Libor floor, you want to remove the Libor
floor,” said Jim Brill, treasurer and chief administrative
officer at Calabasas, California-based On Assignment.
The company also refinanced in August 2016, but was unable
to remove the 75bp Libor floor. One-month Libor on September 1
was 52bp, which meant that the company had to pay around 23bp
more to meet the Libor floor rate.
During the credit crisis, three-month Libor slumped by 94%
to 28bp in October 2009 from 482bp in October 2008 after Lehman
Brothers filed for bankruptcy.
Since the start of 2016 the rate has risen 89% to 1.16% on
April 11, initially in response to pending money-market reform
and then in concert with interest rate hikes. Three-month Libor
topped 1% in January 2017 for the first time since May 2009 and
now exceeds the most common Libor floors of 75bp or 100bp.
The Federal Reserve increased its target interest rate in
March by 25bp to 75-100bp and said it expects two further hikes
this year and three in 2018. Unlike bond investors, loan
investors receive higher yields when rates rise.
Investors have poured more than US$13.65bn into bank loan
mutual funds and exchange-traded funds this year as of April 5,
far exceeding flows of US$8.6bn in 2016, as investors try
to hedge against rising interest rates.
Increasing investor demand allowed borrowers to refinance a
record US$261.2bn of loans in the first quarter, according to
LPC data. The average yield on a B rated loan was 5.02% in the
first three months of the year, down from 6.99% in the first
quarter of 2016.
“Loan pricing is already low, and covenant-lite and
otherwise weak covenant structures dominate the market, so
borrowers in 2017 are clearly targeting the Libor floor as an
additional concession,” said Hoque.
(Reporting by Kristen Haunss; Editing By Tessa Walsh and Jon