LIBOR Transition IS Possible Even for Tough Legacy Bonds. This is why.
From the outset, issuers and institutions have questioned the feasibility of transitioning all LIBOR linked bonds by the December 31, 2021 deadline. With only a handful of mechanisms for legally transitioning to a new rate, and a host of work to do technically, operationally and across front and back offices, it is no wonder some issuers have been sceptical. Add to that a worldwide economic crisis, and the task seems daunting indeed.
Even the Sterling Risk-Free Rate Working Group (RFR WG) which was established to implement the Financial Stability Board’s recommendation for developing alternatives to replace Libor-style reference rates, recently proposed that the UK Government should consider legislation to address ‘tough legacy’ exposures. Tough legacy contracts are considered those lacking robust fallbacks and falling into one or more of the following categories: (i) have contracts that form part of complex transactions or arrangements (ii) have broad distribution where there may be additional complications with obtaining the necessary consent (iii) retail counterparties are involved.
But the Bank of England and FCA remain firm in both their deadline and the advocation of consent solicitation (an EGM in which bondholders approve the new rate) as the best way forward for issuers, even those with tough legacy contracts.
They recently released an official statement saying that the deadline has NOT changed in light of COVID-19 and that firms should continue their work in transitioning away from the rate.
And the Financial Services Regulatory Initiatives Forum just announced the introduction of a 'Grid', laying out the timetable for all major initiatives, including any delays. All other initiatives have been delayed due to the coronavirus pandemic, EXCEPT the LIBOR transition, for which the deadline remains firm.
As for why the leading regulatory bodies advocate consent solicitation as the preferred method for transitioning, it is because consent solicitation entails the least legal, economic and logistical risks, and avoids potential conduct risk as well. Consent solicitation requires identifying bondholders, explaining the transition, and asking them to vote in an EGM that approves the new rate. Seventy-five percent of bondholders must agree. No alternative method offers as safe a transition.
So for those hoping for a delay, or a legislative fix in lieu of the consent solicitation process, it is safe to say chances are near nil.
In good news for LIBOR issuers however, neither the deadline nor consent solicitation process are insurmountable hurdles. There are capital markets intelligence firms that specialise in the end-to-end bondholder-identification-EGM-vote-solicitation process. The entire ‘problem’ can be outsourced effectively and affordably. Firms like CMi2i have been performing this exact service for issuers globally long before the LIBOR transition was on the cards – helping companies to accurately identify, communicate with and solicit votes from bondholders in order to pass amendments to terms and conditions. Not only is it possible, it certainly possible within the time frame given.
Mark Simms, CEO of CMi2i, commented, “The bondholder identification and consent solicitation process can be completed in a few months, but we would urge issuers to start immediately to avoid the LIBOR bottleneck. Those that wait until just before the deadline will have a difficult time finding reputable providers that have the bandwidth to assist.”
What exactly does CMi2i’s end-to-end process entail? You can find out more on their website here or by requesting a LIBOR Transition Solution meeting here. But the bottom line is this: Issuers don’t need a legislative fix, they need to get moving.
Written by Audra Walton
About CMi2i
CMi2i is a leader in capital markets intelligence, specialising in the world’s most accurate Equity & Debtholder identification service. As an issuer agent, CMi2i supports issuers and their advisors with investor relations, M&A, shareholder activism, capital restructuring and reputation management goals. The company has supported more than 1000 corporate transactions, 1200 AGMs and has over 500 clients worldwide. CMi2i’s LIBOR Solution provides an end-to-end service for issuers wishing to identify bondholders and solicit their approval for the new rate.