Libor replacement rate Sonia gathering steam
(5 November 2019 - United Kingdom) UK banks including Lloyds, Santander UK and Nationwide are following ABP with a heralded £4 billion Sonia (Sterling Overnight Index Average) legacy bond transition away from the London Interbank Offered Rate (Libor).
Bond issuers and investors are gradually working through the significant £62 billion pile of Libor-linked sterling notes due to mature in Q4 2021 when the condemned benchmark will be obsolescent. Banks and investors are beginning to switch to other interest rare benchmarks such as Sonia, including those more closely linked to government or risk-free rates. In Q2 2018 holders of a £65 million floating rate note issued by Associated British Ports voted to attach the bond to Sonia, the risk-free rate set to replace Libor in sterling markets.
China also sold €4 billion of bonds due in seven, 12 and 20 years bonds denominated in Euros for the first time in 15 years, a shift that could encourage Chinese corporates to follow suit in order to reduce their reliance on dollar funding. Demand was strong, with investors, including the banks managing the deal placing orders totaling more than €19.5 billion.
Australia's CBA is planning to sell A$1 billion worth of residential mortgage bonds in the country's first public deal that will not use the local Libor equivalent benchmark, the bank bill swap (BBSW) rate. Although the Australian corporate regulator implemented changes to the BBSW methodology in 2014 that require it to be based on actual transactions and not a survey, regulators still expect a local transition into alternative benchmarks such as the Australian Overnight Index Average (AONIA) which is based on the central bank's official cash rate, which is currently at 0.75 percent. The top-rated portion of Commonwealth Bank's deal, called Medallion, is expected to pay 125 basis points over the compounded daily AONIA rate, according to a statement by the bank.
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