By Alun John
HONGKONG (Reuters) – Bankers are readying Asian clients to issue more bonds linked to the new interest rate benchmarks replacing Libor after Bank of China sold the first such private sector deal in the region last week.
Bond coupons, or interest rates, are typically priced relative to benchmark rates such as the London Interbank Offered Rate, or Libor. However, that standard was discredited after many of the world’s biggest investment banks pled guilty or paid large sums to settle accusations that they colluded to rig Libor and other benchmarks.
Last week Bank of China sold $350 million in three-year floating rate notes linked to the Secured Overnight Fundraising Rate (SOFR), a relatively new rate published by the New York Federal Reserve and tipped to replace U.S. dollar Libor. It was the first such offering from Asia’s private sector.
While the BOC’s issue was relatively small, bankers involved in the deal said they expected it will open the market for other borrowers.
Christophe Cretot, head of debt origination and advisory, Asia-Pacific at Credit Agricole CIB, was involved in the deal and said the BOC’s SOFR tranche was “defensively sized” to allow underwriters to sound out interest in the new securities.
“We were positively surprised by the level of response that we got from the investors, it was better than we had anticipated,” he said. However, he acknowledged many banks and investors in Asia did not yet have systems in place to process SOFR transactions.
“I’m not expecting SOFR linked bonds to become the norm tomorrow, but we expect to see more and more of these in 2020,” Cretot said.
Shifting new and existing contracts to use the new rates is a major challenge for investors, banks, and many bond issuers. Libor underpins hundreds of trillions of dollars of existing derivative contracts, loans and bonds around the world.
SOFR is based on the pricing of rates in the Treasury repurchase market and was first published last year.
Asia currently lags North America and Europe in preparing for the end of Libor, currently due in 2021, and companies in the region have also lagged peers elsewhere in selling bonds linked to SOFR or any of the other new rates intended to replace British pound Libor or Euribor.
“My sense is that pace of (adoption of new interest rate benchmarks) will be non-linear,” said Tim Galt, head of debt capital market syndicate at UBS. “We are likely to see steady progress followed by a sharp acceleration in adoption, leaving early movers well placed” he added.
(Reporting by Alun John; Editing by Jennifer Hughes and Sam Holmes)