Both these companies have since completed the amendments after tweaking the terms to include a CSA.

“There’s been some pushback,” a portfolio manager said. “To offer nothing seems kind of disadvantageous to lenders.”

Pressure

US Dollar Libor rates will no longer be published after the end of June 2023, so there’s growing pressure on companies that have not yet switched to SOFR to amend their credit agreements to incorporate the replacement rate.

Basically all new issue loans now are now printed over the SOFR rate, but there is still a mountain of existing debt with Libor-based coupons.

Some credit agreements incorporate so-called fallback language, allowing them to flip automatically to an alternative rate when LIBOR is no longer published. For borrowers that don’t have that language, a traditional amendment is the only real solution.

From a lenders’ perspective, the problem is that SOFR has historically traded at a lower spread than Libor. For this reason, most issuers looking to switch to SOFR have offered investors a credit spread adjustment (CSA) to soften the blow.

In recent days, hotel operator Hilton and equipment leasing company Electro Rent have both switched from Libor to SOFR, paying investors a 10bps CSA. Satellite company Iridium Communications recently launched a similar amendment, with a 14 December deadline.

Today, digital font company Monotype Imaging also said it would offer 10bps CSA to flip its TLB from Libor to SOFR. The deadline for the amendment is 23 December.

But despite the growing consensus around the 10bps CSA in this market, there’s no hard and fast rule that issuers need to obey.

In January 2020, the Alternative Reference Rates Committee recommended that borrowers offer 11bps of CSA for the one month rate, 26bps for the three month rate, and 46bps for the six month rate.

But these are only recommendations, so perhaps it’s no surprise that some borrowers have looked to push the envelope. “I would like it to be standard, but it's not necessarily standard,” said one PM of the adjustments.

Pushback

It’s not easy for investors to push back on any attempts to push these amendments, because of the way the consent language is presented.

The amendments are presented as “negative consent”, meaning investors have to proactively object to the proposal or their consent is presumed. On top of that, a majority of investors has to object for a proposal to be blocked.

“That’s pretty tough, given you really only have a few days to object,” said a second portfolio manager.

Still, the effort can pay off if lenders can marshal their efforts.

Allied Universal ended up offering a 10bps CSA to get its $4.1bn of US dollar TLB debt switched over to SOFR — broadly in line with the growing market consensus. Allied Universal did not respond to a request for comment.

By contrast, PetCo had to come back to market with sweeter terms to push its own amendment through.

Sources said it got the deal done by offering investors a CSA in line with ARRC recommendations: 11bps for the one month rate, 26bps for the three month rate, and 46bps for the six month rate.

A Petco spokesperson noted that the initial proposal was not formally blocked by lenders, but withdrawn by the company.

Tough market conditions may be playing some part here. No doubt more companies would have success getting a no-CSA amendment through when the market is hot again.

Still, some investors put it down at least in part to investor determination.

“They messed up by trying to get no CSA adjustment,” said one lender. “If they had tried the 10bps adjustment off the bat, they could have gotten it done with that.”