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Borrowers Look To Lock LIBOR Curve

Some issuers are looking to lock in nine-month and 12-month LIBOR in expectation that interest rates will continue to rise to the point where they can save on interest costs.

Some issuers are looking to lock in nine-month and 12-month LIBOR in expectation that interest rates will continue to rise to the point where they can save on interest costs. Borrowers typically peg to three-month LIBOR with pricing resetting every quarter. But with rates on the rise some companies are figuring they can do better long-term, and so far they have been correct.

Three-month LIBOR is currently 2.85%, six-month LIBOR 3.08% and 12-month LIBOR 3.41%. "If you can lock in a longer dated LIBOR, you can understand why companies want to do it," said a portfolio manager based in New York. But it is another pain in the neck for collateralized loan obligation managers. "If you are a CLO, your LIBOR is resetting every quarter. You're getting squeezed. It is something you try and push back on." Any request beyond the allowed nine months needs lender approval, he said, admitting, "We're pretty reluctant."

Another buysider added, "I haven't seen it actively taking place, but I'm not surprised. It must be something coming into the works...I think it's something we will see more of being attempted." The action could result in increased spread compression which he noted "would be a very bad trend."

However, the first portfolio manager said that although these longer interest rates are not favorable for CLOs, it is not a primary concern. "I wouldn't call it a crisis," he said. "The bigger concern is the tightness of spreads and things like that: shortage of collateral and prices people have to pay. That is more of a concern from a manager's standpoint." Another portfolio manager said, "It's just another term that investment banks think they can offer to the borrower that can help with debt." Taking advantage of LIBOR price shifts is not unprecedented. When interest rates were falling sharply a few years ago, some lenders pushed for borrowers to move to longer-dated amounts.

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