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The demise of IBOR: key considerations to prepare for the phase out

25 June 2020

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At the end of 2021, the Inter Bank Offered Rate (IBOR) is due to be phased out. Alternative Reference Rates (ARRs), also known as risk-free rates (RFRs), have been identified as a replacement in most jurisdictions.

While the abolition date may seem distant, investors will be looking for issuers to address the slew of changes sooner than later. We recently hosted a webinar, where we welcomed a panel of experts moderated by Cliff Pearce, Global Head of Capital Markets to discuss the end of IBOR and what the impact will be. Our expert panelists were Miles Hunt, Head of Securitised Products and Alternatives Syndicates at NatWest Markets, Rob Ford, Founding Partner at TwentyFour Asset Management, Simon Hugo, Partner at Reed Smith, and Helena Whitaker, Head of UK Capital Markets at Intertrust.

Market readiness

From the perspective of the banks, it’s highly likely that they’ll be ready; in fact, there’s no option not to be ready. A number of bank issuers have already started to make the proactive step to transferring their older legacy deals that will cross over into 2021 to alternative rates. From the regulators point of view, they’ve been very clear on the deadline and despite COVID-19, they’re not likely to budge. For other market participants, particularly regulated firms, they’re still getting to grips with the scale of the issue and how it’ll work it out. Some haven’t yet addressed the IBOR problem at all and, in some cases, new deals with IBOR coupons are still coming to market. For service providers, like Intertrust, many were making good progress this year with IBOR preparations however the coronavirus has resulted in delays. For us, we’re active in facilitating the repapering of the IBOR rate and are working closely with clients to ensure the deadline is still met in a timely manner.

Rates are currently at an all-time low, resulting in a lot of interest rate risk on the books, so it’s clear that during this time of uncertainty, everyone needs to continue monitoring the market to prepare and know when the right time will be to make the transition.

Risk-free rates: fit for purpose?

The securitisation market has already started to make the switch to a Sterling Overnight Interbank Average rate (SONIA). Despite overnight rates being quite volatile and more complex, it’s still a workable option for the most part. Additionally, there are rumours that changes could be made to the SONIA methodology and if this will be the case, then it needs to be done sooner than later. It’s not a viable situation to have half the bonds on one methodology and half the bonds on another. With 18 months to go until the deadline, clarity is needed, and it’s needed fast.

The backwards looking methodology is relatively complex, complicated and difficult to manage but these complexities are getting ironed out, with the larger institutions still seeing this option as fit for purpose. There’ll always be teething issues with the introduction of new rates, and whilst having a simpler rate might make more sense, the market liquidity is in the overnight rate. This will be the alternative RFR that’s here to stay.

Where does ultimate responsibility lie?

The ultimate responsibility for resolving and repapering lies with the companies, lenders and issuers. In the structured finance and securitisation space, it’s very much done in conjunction with any originators or lenders. The mortgage lenders (or servicers) need to engage with service providers and issuers early on to ensure both sides are addressed. A number of investors are actively engaging service providers like Intertrust to find out what the plans are. On the most part, it’s seen as very much a joint effort to reach an IBOR resolution.

On the trustee and facility agent side, they’re generally waiting to see what the issuers do first and aren’t necessarily seen as the drivers for initiating the IBOR transition plans. This isn’t to say that the trustees won’t be helpful in the process. To do their bit, they’re starting to take stock of their books, particularly the legacy transactions, and ensuring obligations that do sit with them are met. They’re also likely to be involved when it comes to any amendments or consent solicitations that need to take place, so they’ll very much take an active role once the process gets going, even if they’re not necessarily the initiators.

Big issuers want to be on the front foot. Most of the issuers and investors want this transition to happen and, in many cases, they’ve needed a leap of faith to identify the appropriate rate at the right time to make the transition. The bulk of the market will move but the legacy deals will have a tail that needs resolving. The sooner there’s a decision on how these legacy deals will be resolved, the less volatility there will be in the market.

TwentyFour Asset Management have embraced the IBOR phasing out from a change point of view and want to see it happen. There are some costs associated with the legacy deals and minefields of issues that still need working through but, in general, it’s recognised that this process needs to happen, and service providers can be the facilitators in navigating through these minefields.

Next steps

As one of the largest corporate services providers in Europe and across the globe, we’re at the forefront of all processes following the ending of LIBOR and can facilitate and implement new RFRs. With experience and expertise in all elements that need to be addressed, we’re happy to discuss your next steps in embracing all the changes the phasing out of IBOR will bring.

If you’d like to download the recording of the webinar, please click here.