Monday’s short paper from the Working Group on Sterling RFRs helpfully covers old ground. The best way to avoid LIBOR discontinuation issues is not to choose LIBOR in the first place(!), maybe using a backward-looking SONIA like the EIB did last month instead. If not:

  • If you reference LIBOR and it goes, and your reference banks don’t quote, the ultimate fallback is usually to take the last known rate and carry on using that – so the FRN becomes a fixed rate bond at that point – not what the parties would have wanted (and would it trigger optional early redemption, and if so who could call it?)
  • There could be hedging issues if a related interest swap switches to a fallback which is different from the FRN fallback and/or at a different time.
  • Amending T’s & C’s isn’t easy, and some holders may vote against it if that suits them commercially
  • Referencing LIBOR and concocting fallback wording to address its discontinuation is tricky as yet because it is impossible to know what the fallback might be or when it should be triggered (but you might put money on backward-looking SONIA)
  • Issuers might include a “negative consent” provision, common in securitisations but not yet in vanilla issues, to help make any necessary amendments.

It seems to go too far with its suggestion that investors might claim mis-selling “even if the prospectus disclosure accurately describes … and sets out the associated risks”, but beefing up the disclosures is obviously prudent; and is already being done. ISDA’s consultation runs to 12th October, and the WG’s consultation on an IBOR replacement runs until 30th September. The WG reckons a term SONIA reference rate could be available by H2 of 2019. In tandem, we can expect standard definitions of backwards and forwards looking SONIA etc. from ISDA and the LMA.