Halister News

(Bloomberg) -- Borrowers and investors should look carefully at yield protection clauses in loan agreements in a rising rate environment, Moody’s researchers led by Derek Gluckman wrote in a note.

• Importance of soft calls and MFNs, which are designed to protect investors when borrowing costs fall, “seems counterintuitive” given expectations Fed will raise rates three times in 2017
  • Fed’s December rate hike drove investors to floating rate instruments which sparked lower borrowing costs and wave of refinancings
• Repricing protections will continue to benefit investors, especially longer-term protections
  • In 2016, 66% of loans had 6-month soft call clauses and 31% had 12-month; 2015 was the last time any loan had soft call protections of more than 24 months
  • 94% of loans in 2016 had MFN protections, which are meant to preserve loan values in secondary trading; 80% of loans granted protection for the life of the credit facility and 14% had sunset provisions that expired after 12 or 18 months
• Sunset provisions, which allow protections to expire even as loans remain outstanding, “will have a more pronounced negative impact on investors going forward”