FCA calls for market participants to transition outstanding LIBOR-linked bonds
The UK Financial Conduct Authority (FCA) is strongly encouraging issuers and bondholders of outstanding LIBOR-linked bonds to consider this information and take the necessary action to transition outstanding LIBOR-linked bonds to fair alternative rates.
Many legacy LIBOR-linked bonds (including securitisations and other similar structures) have now been converted by mutual agreement of issuer and bondholders to Risk-Free Rates (RFRs) through processes such as consent solicitation.
The regulator urges issuers of the remaining LIBOR-linked bonds (or those that may have a future LIBOR-linked dependency) issued under English or other non-US laws which make consent solicitation practicable, to schedule consent solicitation processes for conversion to fair alternative rates. The relevant RFR plus the industry-agreed spreads that have been used in successful consent solicitation exercises to date provide a model for such conversions. Responsibility for initiating this process lies with the bond issuer.
The FCA also encourages holders of bonds without robust fallbacks or another mechanism to remove reliance on LIBOR, to engage with the relevant issuer(s) or their agent(s) and request that they initiate these conversion processes.
Some issuers and bondholders have benefitted from the temporary continued publication of the 1-, 3- and 6-month sterling and yen LIBOR settings using a ‘synthetic’ methodology. The FCA required publication of these synthetic LIBOR rates to avoid a cliff edge at the end of 2021. This has given issuers more time to arrange transition to more robust alternative rates.
However, publication of synthetic yen LIBOR will cease at the end of 2022.
The FCA has proposed to cease the requirement to continue publication of the 1- and 6-month synthetic sterling LIBOR settings at the end of March 2023. The regulator has also sought views on the earliest date at which the 3-month sterling LIBOR setting could also cease in an orderly fashion.
Publication of synthetic LIBOR settings will be for a temporary period only, and relying on such publication is therefore not an alternative to agreeing conversion through consent solicitation, or other arrangements for longer-maturity bonds.
The US dollar LIBOR panel ends at end June 2023. While bonds issued under US law may benefit from US legislation to convert these to RFRs at end June 2023, there are also significant numbers of US dollar LIBOR bonds issued under English (and other non-US) law. These will not benefit from US legislation. However, conversion through processes such as consent solicitation is usually practicable under the standard terms of bonds written under non-US law in a way that may not be the case for those written under US law.