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US Dollar Libor Transition Enters Critical Phase for Leveraged Lending Market

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The one-year countdown began on Thursday to the end of the release of the degraded London Interbank Offer Rate, or Libor, for existing US dollar-denominated contracts, and volatile market conditions have slowed the move to new rates for some market participants.

“We have 12 months until D-Day from an old paper perspective,” said Tal Reback, who leads KKR’s global Libor transition efforts for private equity, credit, capital markets and real estate. “The next six to nine months is really the critical range because you’ve already lost a few months this year due to market volatility,” she said.

In the leveraged loan market, volatile market conditions have prevented many issuers from tapping into the markets, which is when they would normally revisit existing debt and potentially convert it to a different interest rate benchmark, slowing the transition, Reback said.

According to JPMorgan and IHS Markit, 87.8% of leveraged loans are still pegged to Libor.

Once called the most important number in the world, Libor has been used worldwide to price everything from mortgages and student loans to derivatives and credit cards, worth hundreds of trillions of dollars.

Regulators have ordered the end of Libor after levying multibillion-dollar fines on banks for manipulating interest rates, and recommended that market participants use alternatives compounded by central banks, such as the Federal Reserve’s secured overnight financing rate (SOFR).

Calculated in five currencies, Libor was largely phased out for new business at the end of 2021, although the majority of existing US dollar-denominated contracts have until June 30, 2023 to make the switch.

Other parts of the market have made significant progress, with SOFR futures surpassing eurodollar futures contracts on the CME for the first time in April, and federal legislation in March allowing contracts that lack the mechanics to move from one course to the next. others can switch to SOFR.

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