October 16, 2017 / 3:39 PM / a year ago

LPC: JDA seeks to leave options open when choosing borrowing benchmark

NEW YORK, Oct 16 (Reuters) - JDA Software wants the ability to choose a benchmark it sees fit to set interest payments on a US$1.24bn loan without getting permission from most of its lenders.

Markets that rely on the London interbank offered rate (Libor) have been scrambling to include language in agreements that offer options for the future after the head of Britain’s financial markets regulator said in July that a substitute for the benchmark must be in place by the end of 2021. The US$938bn loan market is starting to evaluate potential language for deal documents to allow for alternatives.

Supply chain management software company JDA, which received an equity injection last year from the Blackstone Group and New Mountain Capital, is currently asking to cut its interest payments to 275-300bp on a loan that has been syndicated among several financial institutions.

As part of the changes to its credit agreement, it included a term that would allow it to change the benchmark used to set interest payments if Libor goes away. To do this JDA would only require the approval of the loan’s agent, JP Morgan, and not that of other lenders in the syndicate, according to sources.

Leveraged loans pay interest rates at a spread over Libor. Some investors are concerned the provision gives the borrower too much authority to make a change that could impact interest payments without lender input, the sources said.

Set by submissions from banks based on the rate they believe they would be charged for borrowing, Libor is a mainstay to the US leveraged loan market, and borrowers and lenders are seeking to include provisions in agreements that offer flexibility to use alternative rates in the future. A number of benchmark alternatives are currently being discussed.

The term in JDA “is a variation we have seen and there are multiple variations floating around in market,” said Jessica Reiss, co-head of leveraged loan research at Covenant Review. “It remains to be seen what gains the most traction.”

The deadline for lenders to commit to the loan is Tuesday.

The loan market follows the US$470bn US Collateralized Loan Obligation (CLO) sector, the largest buyer of the debt, which began including provisions in deal documents just days after Andrew Bailey, chief executive officer of the UK’s Financial Conduct Authority, said Libor must be replaced due to insufficient transactions underpinning the rates, noting work to shift to an alternative must “begin in earnest.”

US CLO agreements have included a variety of provisions to address a Libor replacement, including adding language that allows for an alternative rate as long as holders of the controlling class confirm the change and rating agencies confirm that it will not affect existing ratings, sources previously told LPC.

A JP Morgan spokesperson and a Blackstone spokesperson both declined to comment. A JDA spokesperson did not return a telephone call seeking comment. A New Mountain Capital spokesperson could not immediately comment. (Reporting by Kristen Haunss; Editing by Michelle Sierra and Lynn Adler)

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