The scandal surrounding the London interbank offered rate isthreatening to undermine confidence in syndicated loans and hastencompanies' flight to bonds.

“What corporate treasurers are concerned about is the damagethis Libor problem will do to market confidence,” said John Grout,the policy and technical director at the Association of CorporateTreasurers in London, which has about 4,500 members. “If peoplelose trust in banks and Libor, which is indexed to a huge amount ofdebt and derivatives instruments, market liquidity could be reducedand borrowing costs could rise for corporates.”

Corporate loans typically pay interest pegged to Libor or itsequivalents in other currencies, and the rate-rigging scandal isspreading uncertainty about whether the benchmarks reflect lenders'true cost of funding. At least a dozen banks are being investigatedfor manipulating Libor, prompting Barclays Plc Chief ExecutiveOfficer Robert Diamond to quit last week after the U.K.'ssecond-biggest lender was fined a record $451 million.

Loans are already on the wane as a funding option for companiesin the U.S. and Europe. More stringent capital requirementsintroduced by regulators to prevent the risky lending practicesthat exacerbated the financial crisis have made it more expensivefor banks to extend loans, and prompted lenders in Europe to pledgemore than $1 trillion of balance-sheet cuts.

Non-financial companies in the U.S. borrowed $483 billionthrough syndicated loans and credit lines this year, a 13 percentdrop from the same period of 2011, while in Europe volumes fell 25percent to $322 billion, data compiled by Bloomberg show.

Loans were overtaken by bonds for the first time in Europe thisyear, according to Fitch Ratings. Bond issues made up 52 percent ofthe 467 billion euros ($575 billion) of new corporate funding inthe first half, compared with 29 percent for the whole of 2011, theNew York-based firm said in a July 3 report.

“Before 2007 our borrowings were linked to base rate not Libor,but then banks insisted we move to a Libor-rated margin as we weretold it was market practice,” said Ben Whawell, the chief financialofficer at Warrington, England-based trucking and warehousingcompany Stobart Group Ltd.

'Any Opportunity'

“The last week hasn't changed anything as far as banks areconcerned,” he said. “They're all in it to make money and they'lltake any opportunity they can to charge you a fee.”

Clare Dawson, the managing director of the Loan MarketAssociation in London, said Libor would continue to be thebenchmark for the syndicated loan market.

“Libor is only one factor that people are looking at when theylook at a loan, either as a means of raising finance or as aninvestment,” said Dawson, whose group represents 486 banks,investors and law firms. “I see no reason why a floating-rate debtproduct won't continue to be a key component of the financingmarket, and clearly most floating rate loans are based off Libor orEuribor.”

Libor is calculated from a daily survey carried out for theBritish Bankers Association in London, in which the world's biggestlenders are asked the rate they're charged to borrow over a varietyof short-term maturities in currencies including dollars, euros andyen. Banks are accused of massaging down submissions for thebenchmark for $360 trillion of global securities during thefinancial crisis and artificially increasing them before it.

The so-called lowballing may have more impact on lenders'returns in Europe than in the U.S., where they've been quicker toadopt Libor floors that set a minimum level for the benchmark. Themain three-month dollar Libor rate held at 0.458 percent today,compared with 5.724 percent in September 2007.

“In the wake of this scandal, we're worried that more banks willstop submitting rates to BBA because of the legal cost andcontroversy involved,” said Grout, formerly finance director ofCadbury Schweppes. “That won't be helpful.”

Bloomberg News

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