The shift away from the discredited London interbank offered rate benchmark crossed a key threshold on Tuesday as Associated British Ports became the first borrower to secure agreement from its bondholders to switch its debt over to a new rate.
At a meeting in London, owners of £65m in floating-rate debt issued by ABP gave their consent to flipping to the sterling overnight interbank average rate (Sonia) — the rate that UK regulators are keen to see replace Libor when it is killed off at the end of 2021.
The decision means that the UK’s biggest port operator becomes the first company to in effect issue debt based on Sonia, through an approval process that forms a test case for an outstanding pile of debt still pinned to the old rate. More than £30bn of UK floating-rate debt with maturities beyond Libor’s 2021 end-date is still in the hands of investors.
The UK market regulator, the Financial Conduct Authority, said it welcomed ABP’s switch. “As this successful conversion shows, both issuers and investors can benefit from removing a dependency on Libor given its future disappearance after end-2021,” the FCA said. “This establishes a model that other issuers and their investors can follow.”
Heavy-hitting financial regulators from the US and UK last week urged banks and investors to step up preparations for life after Libor, and to stop writing any new contracts with Libor embedded in the terms.
David Ramsden, the Bank of England’s deputy governor for markets and banking, said it was “last orders” for Libor and made it clear the BoE would step up monitoring of banks’ progress.
Though rooted in good intentions after the Libor manipulation scandal, the move away from Libor is riddled with difficulties, as the rate is embedded in everything from complex derivatives to mortgages. The general counsel of the New York Federal Reserve has referred to the transition as “a defcon 1 litigation event if ever I’ve seen one”, noting potential clashes between banks and their own clients. How the shift affects bonds, loans and derivatives containing references to Libor, but expiring after 2021, is one of the trickiest issues. Holders of floating-rate notes are entitled to refuse to switch if it leaves them out of pocket.
ABP has become the first company to deal with this process of seeking approval. Up to now, its bonds have paid regular instalments of cash at a rate determined by Libor. Now, those instalments will hinge instead on Sonia, an overnight rate which is based on real transactions rather than on traders’ submissions. Other borrowers will need to follow ABP’s lead in winning approval from bondholders for this step.
“The direction of travel from the BoE and the FCA is clear: there is a lot of legacy debt out there and they don’t want issuers to leave it to the last minute to transition out of Libor,” said Veenay Chheda, one of the bankers involved in ABP’s transition at NatWest Markets. “We would expect, now that we have this template, for more transactions to come through in due course.”
Usually, bondholders are paid a fee when they are asked to give consent to changing the terms of the debt they hold, but in this instance, no fee was paid. The new debt was also designed to flip over to the new rate in a way that did not unduly benefit or harm either the borrower or the investors.
“This is an important transaction,” said Mark Nuttall, a partner at law firm Linklaters, who advised ABP. “It’s not a straightforward process and the industry is working hard to find solutions to address the concerns about how the alternatives may work.”
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