LIBOR discontinuation: first floating rate note amendment to compounded SONIA

United Kingdom

Associated British Ports (“ABP”) have successfully carried out a consent solicitation process in relation to some LIBOR-linked notes issued by their special purpose financing vehicle, ABP Finance plc. The consent solicitation process is thought to be the first such public exercise carried out in relation to floating rate notes as a result of the anticipated discontinuation of LIBOR from the end of 2021. The notes will now pay interest by reference to compounded daily SONIA plus a margin. No consent fee was payable by ABP to noteholders for them to agree to the amendments and the process may lead other issuers to seek amendments to similar outstanding issues earlier than some had anticipated.

The timing of the ABP consent solicitation took some by surprise. Although regulators are applying pressure on market participants to take a proactive approach in relation to their LIBOR positions, there is still some time before banks stop being compelled to provide LIBOR quotes and therefore when LIBOR is likely to cease. Issuers do not generally want to be the first to market on such a big issue in case they fail in a public manner or are criticised for taking a position that isn’t favourable to everyone. Although compounded daily SONIA is becoming increasingly common on new floating rate issues, questions remain around how popular it will be as a replacement for LIBOR, including the fact that it does not give certainty of interest costs (or receipts) until the end of the relevant period. The Bank of England’s Working Group on Sterling Risk-Free Rates “Consultation on Term SONIA Reference Rates" published in July last year highlights some of these concerns.

The anticipated discontinuation of LIBOR affects market participants’ loan and derivatives books as well as their bond positions. As such, we had not expected amendments to floating rate notes until the ISDA timetable for implementation of IBOR fallbacks was better progressed more generally later this year. Although SONIA is becoming increasingly common on new transactions (including recently in securitisations), investors and issuers who agree amendments to their existing bond portfolios early will need to consider corresponding changes to their hedging portfolios and any operational implications of using the new rates. Investors will be keen to avoid hedging mismatches and the accounting issues they can cause.

No consent solicitation fee was offered or paid by ABP, not even a nominal work fee (or “get-out-of-bed fee”). This will be particularly good news for sponsors, originators and other market participants who are involved in heavily structured and cash-flow-driven transactions such as securitisations. Little excess is maintained in the structures with cash generated being passed to investors and other parties and there is typically little or no scope for unanticipated charges like consent fees (or increased margins that have the same commercial effect) to be absorbed by the structure. Issuers more generally will also be pleased that there is a precedent for a fee-free amendment. Although a margin above SONIA is payable under the revised terms, the core margin of 2.5% is the same as under the notes before the amendment, with the additional adjustment essentially being to reflect the basis between LIBOR and SONIA swap transactions for the relevant period. The proposal is arguably as close as possible to being commercially neutral from a pricing perspective, so it is probably accurate to regard the transaction as being “fee-free” (though of course there are costs involved in documenting and running a consent process). The news may not be so welcome for investors, who may feel they have lost considerable leverage and the prospect of consent fees after today’s result.

Launching the first public process so early could have been seen as a risk. However, it is likely that key investors were consulted in advance. There is no indication that a formal holder committee was convened to discuss the proposal (a process generally facilitated by the Investment Association, the outcome of which would often be disclosed in the Consent Solicitation Memorandum). However, this may just be an indication that the notes here are held by a small number of investors who were probably “wall-crossed” before the consent process launched formally. Issuers typically want a degree of certainty about the outcome before launching a public process (subject to the increasing constraints investors place on issuers because they do not want to be in receipt of potentially non-public price-sensitive information and therefore “off-market” for too long).

Anyone wondering how the debate went at the noteholder meeting will be disappointed – it would be extremely unusual for anybody to attend in person, with the result having been sewn up through the clearing systems in advance. Today’s meeting would have been a very procedural affair lasting just a few minutes, with lawyers, the trustee and the agents reading through scripts and filling in forms. But the meeting has a much greater symbolism in the discontinuation of LIBOR. If the success of the ABP process indicates a more general willingness of investors to amend floating rate note provisions without a fee, it is likely to be the first of many such exercises in the coming months and years. It also suggests that investors may not be so concerned about migrating to a compounded daily SONIA rate as the Bank of England consultation suggested.

As a firm, CMS are at the forefront of developments on the discontinuation of LIBOR including implementation of associated fallbacks and amendment processes across all bond, derivative and loan documentation. To discuss the implications of the ABP consent process, or any other requirements you may have in relation to loans, capital markets instruments or hedging, please get in touch.