Walker & Dunlop secures first leveraged SOFR loan

(Bloomberg) – Mortgage lender Walker & Dunlop Inc. has become the first company to announce a leveraged loan sale in the United States that fully embraces regulators’ preferred replacement for the London interbank offered rate, a milestone important in the abandonment of the Libor which could finally trigger a flood of copiers.

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The $ 600 million, seven-year loan will be compared to the guaranteed overnight rate, according to a person familiar with the matter. Libor is being phased out due to the rigging scandal that erupted a decade ago, and SOFR is a prime candidate to fulfill its role.

Once 2022 begins, a wide range of newly issued financial products, including business loans, will no longer be able to reference Libor – a major challenge as the rate has been fueling these markets for decades. Those issued before January 1, 2022 can still use Libor until mid-2023.

Leverage loans have been slow to adjust to this new reality. SOFR acceptance has been hampered in part by the lack of tenors beyond one day, while Libor has maturities of up to one year. Bankers, businesses and investors were waiting for the Federal Reserve-backed Alternative Benchmark Rate Committee to ratify the one, three and six-month versions of the SOFR. This happened on July 29, but there was no immediate change to issuing new loans in SOFR.

Previously, a leveraged $ 750 million SOFR loan funded the purchase of chicken processing company Sanderson Farms Inc. But it will initially be tied to Libor in 2021 before moving to SOFR next year.

The Walker & Dunlop loan differs as it will never use the Libor. Its interest rate will be based on the SOFR plus some adjustments. The exact details will be revealed as the deal is marketed to investors.

The company uses the proceeds of its transaction to finance the acquisition of Alliant Capital and to refinance existing debt. A call to lenders will take place on Tuesday and the pledges are due Oct. 14, according to the person, who asked not to be identified about a private transaction. JPMorgan Chase & Co. manages the sale.

Ford Motor Co. was the first company to use SOFR as part of a large-scale business loan when it decided to refinance its revolving credit facilities with the benchmark rate earlier this year. But it was not a leveraged loan, a type of financing that is sold to a large base of institutional investors, rather than to banks.

(Updates starting in the first paragraph with more context.)

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