The Wall Street Journal asks Amol Dhargalkar why companies are keeping LIBOR debt on their books
Summary
The Wall Street Journal spoke to Amol Dhargalkar to understand why companies are keeping LIBOR debt on their books rather than replace it with SOFR when they refinance their loans.
The Wall Street Journal“We’re going to see Libor-based hedging as long as there is Libor-based debt to be hedged,” said Amol Dhargalkar, managing partner and global head of corporates at Chatham Financial, a financial-risk adviser.
Since Jan. 1 of this year, companies have had to link new debt to benchmarks other than Libor, as U.S. banks could no longer issue Libor-linked loans, with most of them picking the Secured Overnight Financing Rate, or SOFR.
But there are still a lot of existing loans tied to Libor on the books, and companies are trading Libor derivatives to hedge financial risks stemming from high inflation and interest rate increases, corporate advisers said.
“We’re going to see Libor-based hedging as long as there is Libor-based debt to be hedged,” said Amol Dhargalkar, managing partner and global head of corporates at Chatham Financial, a financial-risk adviser.
Companies usually replace Libor when they refinance their loans. But they might decide against refinancing now, possibly because they did so last year and want to avoid the incremental cost of doing it again, Mr. Dhargalkar said. Companies didn’t have to swap out Libor in financings completed in 2021, so many companies simply stuck with it when they refinanced, adding language that allows for a transition to SOFR if necessary, he said.
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