LIBOR’s uncertain future causes headache for $512bn legacy bonds

As global regulators prepare for the LIBOR benchmark to be ditched by the end of 2021, analysis published by Linklaters today shows that there are more than $512billion worth of legacy bonds which will need to switch to an alternative reference rate. These bonds currently reference LIBOR but are due to mature after the switch-off date, leaving the market with a huge task of migrating them to the appropriate replacement rates. 

Banks have been fined around $9billion for trying to rig LIBOR, the London interbank offered rate, prompting regulators to come up with alternatives. Britain’s Financial Conduct Authority has therefore set an end 2021 deadline after which it will no longer use its powers to compel banks to submit to LIBOR. 

If LIBOR ceases to be published, thousands of bonds will lose the reference rate that forms a key part of the basis of their value.  If the terms of these legacy bonds are not amended, they could revert to a fixed rate for their remaining life.  This would cause problems for both issuers and investors as it is in direct contrast to how the relevant issues were initially set up.

Unfortunately amending bond terms is not a simple process. 

Mairéad Duncan-Jones, Capital Markets lawyer at Linklaters, says: 

“The shift to a new benchmark for new bond issuances is perhaps the easiest part of the transition process. But when it comes to legacy bond contracts and how you move those to a new benchmark, that’s where things become very challenging. From determining the appropriate rate and any necessary adjustments to it, to the administration and cost involved in convening bondholder meetings - it’s a complex undertaking.”

UK authorities are promoting SONIA, a measure of the rate at which interest is paid on sterling short-term wholesale funds, as the replacement for Sterling LIBOR. New bonds referencing it are beginning to come to market, with the likes of the World Bank, Euroclear Bank, Lloyds , the European Investment Bank and Santander all having done SONIA-based issues recently.

Richard Levy, Capital Markets partner at Linklaters, says:

“This is a significant change for the markets to adapt to. For now, the focus is on using alternative benchmarks for new issues. Before long, however, issuers and their advisers will need to address the issue of the legacy LIBOR-based bonds.”