The transition away from Libor is hitting a milestone as Ford Motor Co. does the first syndicated U.S. corporate loan tied to regulators’ preferred replacement for the benchmark.
The car maker is refinancing three revolving credit facilities using the Secured Overnight Financing Rate, according to people with knowledge of the matter. The company is also embedding climate-change goals into the deals.
While Ford is breaking ground, more SOFR-linked deals should be coming. After New Year’s Eve, new loans can’t be tied to Libor, the scandal-tainted rate that has powered the market for ages. SOFR has made inroads elsewhere in finance, but not syndicated corporate loans, or those sold to a group of lenders.
Representatives for Ford and JPMorgan Chase & Co., which is leading the loan process, declined to comment.
Ford told banks in June that it planned to refinance its revolving credit facilities with SOFR, but didn’t formally launch the deal until this month.
The leveraged loan market, where companies borrow money for longer periods of time from groups of investors, has yet to see its first new loan issued with SOFR.
There are three revolver tranches that Ford is refinancing: a $3.35 billion three-year portion, a $2 billion three-year tranche and a $10.05 billion five-year portion, the people said, asking not to be named discussing a private transaction. Commitments on Ford’s deal are due on Sept. 17 and the company held a meeting with banks about the deal on Sept. 1, the people said.
Revolvers are a special type of loan where a company can repeatedly borrow money and pay it back, similar to a personal credit card.
Bankers and companies have been waiting to see how the first SOFR loan would be structured, and Ford’s could provide a template on how to approach future deals.
If Ford chooses to draw on its revolvers, the cost of borrowing would add together the following components: the current daily simple SOFR rate, a 200-basis-point drawn margin and a roughly 11.5-basis-point adjustment meant to reflect historical differences between Libor and SOFR.
Notably, Ford is using a version of SOFR that is calculated on a daily basis, instead of so-called “term” SOFR which was endorsed by the Federal Reserve-backed Alternative Reference Rates Committee at the end of July. Many market participants had said they were waiting for the forward-looking term version of SOFR to make the switch, which allows companies to borrow in one-, three- and six-month tenors, similar to how Libor functions.
Other companies could copy Ford’s pricing structure, use term SOFR in their deals instead, or come up with new ways to approach pricing.
Ford is also adding a sustainability-linked component to its revolving credit facilities. The company will be judged on three goals:
- Reduce carbon emissions from manufacturing
- Shift manufacturing to renewable energy
- Reduce carbon-dioxide emissions from its cars in Europe
The interest rate on the revolver will rise or fall slightly depending on whether Ford meets those goals.
More companies have been adding environmental, social and governance goals, though the overall impact has been questioned out of concern that little money is on the line.
The refinancing will also remove restrictions on Ford’s ability to pay dividends and share repurchases, which were added last year in the early days of the Covid-19 pandemic, the people added.
– By Paula Seligson (Bloomberg)