Since Andrew Bailey's speech in July 2017 we've seen a steady move from LIBOR to the proposed replacement Risk Free Rates (RFRs) (see BoE statement 15 May 2019). First it was Financial Institutions through the derivative market, then SSAs and Financial Institutions through new bond issuance. The UK's biggest ports operator, Associated British Ports (ABP), made the first publicly stated move by a corporate through the derivative market at the end of last year. Until this week though, no one had announced an amendment in the debt markets.
The announcement by ABP that they are looking to move their £65m Dec 2022 LIBOR Floating Rate Note to SONIA is a big deal. It's not just the first time somebody has publicly stated that they want to amend their existing debt to an RFR (globally), it's also the first time a corporate has announced an intention to borrow on Compounded Daily SONIA, or any RFR for that matter.
So what's been announced?
ABP have launched a Consent Solicitation asking bondholders to vote on the change in interest basis from 3m GBP LIBOR to Compounded Daily SONIA. The new terms are consistent with the existing SONIA bonds in the market, with daily compounding and a five day reset lead - this allows for some visibility of cashflow ahead of settlement and is compatible with the derivative market to allow for hedging.
With the bond's current fallback meaning a cessation of LIBOR would make the coupon fixed based on the last LIBOR fixing, removing this risk is in the interest of bondholders as well as issuers. ABP are therefore looking to amend at fair value, with no consent fee and the new spread to benchmark priced at mid-market using the interpolated 3m LIBOR vs SONIA basis screen. The consent has a voting deadline of 11 June 2019 and requires 75% of bondholders to vote, with 75% of votes in favour.
NatWest Markets is acting as Sole Solicitation Agent for this landmark exercise, further demonstrating our credentials in SONIA, our market leading volumes in SONIA issuance, derivatives trading and liability management.
Why are ABP doing this now?
ABP have a large interest rate swap portfolio hedging LIBOR linked debt into fixed. ABP see a real risk of debt and derivative instruments having different fallback methodologies and such a mis-match would take them from hedged to unhedged at a time when liquidity in LIBOR markets could be dramatically reducing. By amending both their debt and the associated hedges to SONIA before the end of LIBOR they are future proofing against various possible unfavourable scenarios (see Time to jump clear...).
So what’s the big deal?
Based on Bloomberg's SRCH function, there are over 200 GBP LIBOR linked bonds maturing after 2021, with a total notional of over £30bn. There's plenty more in the loan and Private Placement markets and in other currencies.
Consent solicitations are one of the ways to amend the terms and we expect others will follow ABP to remove their LIBOR risk ahead of time. Whilst other Issuers may have different objectives in managing their LIBOR based debt obligations we believe that that the process and documentation we have used with ABP will help facilitate subsequent similar exercises.
The Risk Free Rate Working Groups are in ongoing discussion around broader methods to help facilitate similar changes. Such alternatives are likely to be particularly important in the USD market where the required consent threshold can be 100%.
For any exercises where a specific piece of debt (e.g. FRN, loan or Private Placement) is being amended, the pricing methodology proposed by ABP and NatWest Markets should be very relevant. It's simple and transparent whilst remaining fair and in line with the derivative market for those that want to amend hedges simultaneously.
Today is one small step for ABP. Let's hope it's one giant leap for the market...
Phil Lloyd - NWM Sales
Luke Hasham-Smith - NWM Corporate F&RS
Andrei Irimia – NWM Hybrid Capital & Liability Management
Veenay Chheda - NWM Hybrid Capital & Liability Management
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