The Legacy Challenge In LIBOR Transition
November 2, 2020
-
4 minutes
With LIBOR's scheduled sunset looming at the end of 2021, many investors are finding themselves in a difficult situation: what to do with the billions of dollars in bonds currently referencing LIBOR?
TD Securities completed an inaugural par-for-par exchange of legacy LIBOR bonds for the Farm Credit System (FFCB) where "old bonds" were exchanged for "new bonds" with updated LIBOR fallback language. The exchange marks the first-ever public LIBOR reform liability management transaction within the domestic USD GSE, SSA, and IG corporate bond markets. The new FFCB bonds will substantively have the same terms as the old FFCB bonds except for the LIBOR replacement fallback provisions which have been updated to the Alternative Reference Rate Committee's (ARRC) recommended language for LIBOR floating rate notes.
“Our goal in offering the exchange was to remove the unanticipated risk that holders of Farm Credit LIBOR floaters would face with LIBOR’s sunset. By offering a par-for-par exchange, investors were able to retain the floating rate investment they expected with the clarity of ARRC’s fallback language as LIBOR transitions. TD worked thoughtfully and diligently with us to identify the optimal method for meeting that goal,” says Glenn Doran, Managing Director at FFCB.
Partnering with our team, FFCB received both comprehensive research and insights on effective post-LIBOR solutions, as well as our experience of applying suitable alternatives on newly issued bonds. The exchange clearly recognizes FFCB as a proactive issuer who made it a priority to inform investors about the risks associated with the end of LIBOR and offered an effective solution.
TD Securities completed an inaugural par-for-par exchange of legacy LIBOR bonds for the Farm Credit System (FFCB) where "old bonds" were exchanged for "new bonds" with updated LIBOR fallback language. The exchange marks the first-ever public LIBOR reform liability management transaction within the domestic USD GSE, SSA, and IG corporate bond markets. The new FFCB bonds will substantively have the same terms as the old FFCB bonds except for the LIBOR replacement fallback provisions which have been updated to the Alternative Reference Rate Committee's (ARRC) recommended language for LIBOR floating rate notes.
“Our goal in offering the exchange was to remove the unanticipated risk that holders of Farm Credit LIBOR floaters would face with LIBOR’s sunset. By offering a par-for-par exchange, investors were able to retain the floating rate investment they expected with the clarity of ARRC’s fallback language as LIBOR transitions. TD worked thoughtfully and diligently with us to identify the optimal method for meeting that goal,” says Glenn Doran, Managing Director at FFCB.
Partnering with our team, FFCB received both comprehensive research and insights on effective post-LIBOR solutions, as well as our experience of applying suitable alternatives on newly issued bonds. The exchange clearly recognizes FFCB as a proactive issuer who made it a priority to inform investors about the risks associated with the end of LIBOR and offered an effective solution.
Hitting the Ground Running
There was no precedent for a benchmark interest rate to disappear; not to mention the additional challenge of not having specific legislation or regulation dictating how to address any impacted contracts in place. However, that is the current case for the cessation of LIBOR.
When the Financial Conduct Authority first announced in 2017 that there is no guarantee that LIBOR would exist past 2021, our team positioned itself to be at the leading edge of expertise across products and functions. Not only did we focus on legacy cash and derivatives, but we began to trade SOFR swaps and help issuers bring SOFR linked debt to the market. We also launched a serious education and analysis effort via our research team. We knew the impact that LIBOR cessation would have on market participants, and the more we delved into product nuances and details, the more our expertise grew as we uncovered hidden complexities and challenges.
"I would argue that LIBOR might be the most important index in the financial markets encompassing loans, bonds and derivatives," says Priya Misra, Global Head of Rates Strategy. "We knew that replacing LIBOR would not be an easy task and would require focus, teamwork and organization. That has been our mantra since the early days of the post-LIBOR discussions, and it is heartening to see us being recognized as a market leader in this area."
In 2018, TD became the only Canadian bank to join ARRC, a group dedicated to help the industry transition from USD LIBOR to SOFR. This gave us an opportunity to remain focused on the challenges ahead and solutions that included appropriate fallback language and conventions for new SOFR products.
When the Financial Conduct Authority first announced in 2017 that there is no guarantee that LIBOR would exist past 2021, our team positioned itself to be at the leading edge of expertise across products and functions. Not only did we focus on legacy cash and derivatives, but we began to trade SOFR swaps and help issuers bring SOFR linked debt to the market. We also launched a serious education and analysis effort via our research team. We knew the impact that LIBOR cessation would have on market participants, and the more we delved into product nuances and details, the more our expertise grew as we uncovered hidden complexities and challenges.
"I would argue that LIBOR might be the most important index in the financial markets encompassing loans, bonds and derivatives," says Priya Misra, Global Head of Rates Strategy. "We knew that replacing LIBOR would not be an easy task and would require focus, teamwork and organization. That has been our mantra since the early days of the post-LIBOR discussions, and it is heartening to see us being recognized as a market leader in this area."
In 2018, TD became the only Canadian bank to join ARRC, a group dedicated to help the industry transition from USD LIBOR to SOFR. This gave us an opportunity to remain focused on the challenges ahead and solutions that included appropriate fallback language and conventions for new SOFR products.
Leading the Way on LIBOR Transition
TD Securities pioneered the first primary market bond issuances using SOFR and SONIA in the U.S. and the U.K. and has remained at the forefront of SOFR issuance. The legacy cash bonds were a challenging issue as the fallbacks could not be modified easily without unanimous consent from all bond holders. The legacy fallbacks were not appropriate and would result in using:
- A poll of London or New York banks, which carries operational and legal challenges.
- The last LIBOR rate available, which results in a fixed rate.
A Blueprint For The Future
For the remaining US$350B in legacy cash bonds linked to LIBOR that exist past 2021 listed on Bloomberg, other banks can view the FFCB exchange as a potential model for their own situations. The widespread support from investors tells us that there is demand from the market, as well as from issuers who may want to remove ambiguity and legal risk. It takes a lot of work to pull it off but is achievable with the right partner.
As regulators increase their supervision and scrutiny of firms' efforts to transition away from LIBOR, liability management exercises to remediate fallback language in legacy LIBOR-linked bonds could play a crucial role in demonstrating to regulators that issuers are doing all they can to minimize their risks and exposures to LIBOR.
ARRC and other regulators have been working on legislation that would address "tough legacy" bonds with inappropriate fallback. However, there is no certainty on if, and when, the legislation will be made into law. The FFCB transaction provides a reliable, post-LIBOR solution that can be used in the interim until concrete legislation addressing LIBOR fallback for tough legacy products is passed.
As regulators increase their supervision and scrutiny of firms' efforts to transition away from LIBOR, liability management exercises to remediate fallback language in legacy LIBOR-linked bonds could play a crucial role in demonstrating to regulators that issuers are doing all they can to minimize their risks and exposures to LIBOR.
ARRC and other regulators have been working on legislation that would address "tough legacy" bonds with inappropriate fallback. However, there is no certainty on if, and when, the legislation will be made into law. The FFCB transaction provides a reliable, post-LIBOR solution that can be used in the interim until concrete legislation addressing LIBOR fallback for tough legacy products is passed.
Disclaimer
TD Securities is providing the information contained in this communication for informational and/or discussion purposes only. This information was prepared by TD Securities sales, trading or banking personnel and does not constitute research. This material does not constitute an offer, solicitation or recommendation to enter into a transaction with you and is not an official confirmation of terms. Any transaction relating to this material would be subject to the final terms as set forth in a separate definitive written agreement that would evidence an arm’s-length commercial transaction between you and TD Securities. This is not a commitment to enter into any transaction.
TD Securities is a full-service securities firm and it and its affiliates may engage in various activities, including securities trading, providing investment banking and financial advice, investment management, principal investment, hedging, financing, brokerage activities and financial planning. Accordingly, any information contained herein should not be viewed as independent of the interests of TD Securities and its affiliates. Such interests may conflict with your interests and you should be aware of such potential conflicts of interest when reviewing this information.
This communication is made without regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this material. As such, prior to entering into any transaction, you should determine the financial suitability, risks and merits of the transaction, including all economic, legal, tax, accounting or any other consequences associated therewith, using your own independent judgment and without reliance upon TD Securities or its affiliates. You should consider seeking advice from your own advisors in making these assessments, including professional, tax, accounting, legal, regulatory and other advisors. Neither TD Securities nor its affiliates make any representation as to any tax, accounting, legal or regulatory issues.
In addition, (a) TD Securities is not recommending an action to you, as a municipal entity or an obligated person, that would constitute advice within the definition of “municipal advisor” pursuant to Section 15B of the Securities Exchange Act (the “Municipal Advisor Rule”); (b) TD Securities is not acting as an advisor to you and does not owe a fiduciary duty to you, including pursuant to the Municipal Advisor Rule, with respect to the information and material contained in this communication; (c) TD Securities is acting for its own interests; and (d) you should discuss any information and material contained in this communication with any and all internal or external advisors and experts that you deem appropriate before acting on this information or material.
The information contained herein is based on material that TD Securities believes to be reliable. However, no representation is made that the information contained herein is current, accurate in all material respects or complete or has been independently verified by TD Securities.
Historic information is not indicative of future performance and you should understand that statements regarding future prospects may not be realized. Any market valuations contained herein are indicative values as of the time and date indicated. Any prices contained herein do not represent a firm bid or offer on the part of TD Securities. Any indicative prices may differ substantially from a firm bid/offer. Firm bid/offer prices can only be obtained on a real-time, expressly agreed upon, basis. Any indicative prices do not necessarily reflect TD Securities’ internal bookkeeping or theoretical data-based valuations.
Certain factors which may not have been assessed for purposes of these indicative prices, including, notional amounts, spreads, underlying volatility, costs of carry or use of capital and profit, may substantially affect a stated indicative price. TD Securities does not guarantee that different prices and/or valuations would not be available elsewhere and suggests that valuations from other sources be obtained for comparison. Accordingly, under no circumstances should you use the prices contained herein for purposes of valuing your own books and records. Any price, valuation or estimate is subject to change without notice and final prices may differ depending on market conditions.
These indications are provided solely for your information and consideration, are subject to change at any time without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this communication may include results of analyses from a quantitative model that represents potential future events that may or may not occur, and is not a complete analysis of every material fact relevant to any product. By accepting this communication, subject to applicable law or regulation, you agree to keep confidential the existence of and proposed terms of any transaction. For further information, please contact your TD Securities representative.
The past performance of any securities, indexes or other instruments referred to herein does not guarantee or predict future performance. Please note that any market values provided may be affected by a number of factors including index values, interest rates, volatility, time to maturity, dividend yields and issuer credit ratings. Any calculations of returns on instruments referred to herein may be linked to a referenced index or interest rate. In such cases, the investments may not be suitable for persons unfamiliar with such index or interest rate, or unwilling or unable to bear the risks associated with the transaction. Any products denominated in a currency, other than the investor’s home currency, will be subject to changes in exchange rates, which may have an adverse effect on the value, price or income return of the products. These products may not be readily realizable investments and / or not traded on any regulated market. Any securities referred to herein involve risk, which may include interest rate, index, currency, credit, political, liquidity, time value, commodity and market risk and is not suitable for all investors.
The products described herein are (i) not insured by the Federal Deposit Insurance Corporation (FDIC), the Canadian Deposit Insurance Corporation (CDIC) or by any other U.S. or Canadian governmental agency, (ii) not a deposit or other obligation of, or guaranteed by, a depository institution, and (iii) subject to investment risks, including possible loss of the principal amount invested.
This material may not be redistributed without the prior written consent of TD Securities. TD will not be liable, whether for negligence, breach of contract or otherwise, for any loss or damage suffered (including, without limitation, indirect or consequential losses or damages or lost profits), resulting from the use of, or reliance upon, this communication.
The distribution of this document and the availability of the products and services referenced herein may be restricted by law in certain jurisdictions.
The terms of New LIBOR Bonds include the Benchmark Replacement Event and are based on, but not identical to, the Alternative Reference Rates Committee’s New Issuances of LIBOR Floating Rate Notes (April 25, 2019), available on the website at www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/FRN_Fallback_Language.pdf. The Exchange Offer Supplement, the Exchange Offer Materials, the Offering Circular, the Incorporated Information and all Term Sheets relating to the Existing LIBOR Bonds and the New LIBOR Bonds are available through the Funding Corporation’s website and are available from the Dealer Manager and Exchange Agent.
TD Securities is a full-service securities firm and it and its affiliates may engage in various activities, including securities trading, providing investment banking and financial advice, investment management, principal investment, hedging, financing, brokerage activities and financial planning. Accordingly, any information contained herein should not be viewed as independent of the interests of TD Securities and its affiliates. Such interests may conflict with your interests and you should be aware of such potential conflicts of interest when reviewing this information.
This communication is made without regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this material. As such, prior to entering into any transaction, you should determine the financial suitability, risks and merits of the transaction, including all economic, legal, tax, accounting or any other consequences associated therewith, using your own independent judgment and without reliance upon TD Securities or its affiliates. You should consider seeking advice from your own advisors in making these assessments, including professional, tax, accounting, legal, regulatory and other advisors. Neither TD Securities nor its affiliates make any representation as to any tax, accounting, legal or regulatory issues.
In addition, (a) TD Securities is not recommending an action to you, as a municipal entity or an obligated person, that would constitute advice within the definition of “municipal advisor” pursuant to Section 15B of the Securities Exchange Act (the “Municipal Advisor Rule”); (b) TD Securities is not acting as an advisor to you and does not owe a fiduciary duty to you, including pursuant to the Municipal Advisor Rule, with respect to the information and material contained in this communication; (c) TD Securities is acting for its own interests; and (d) you should discuss any information and material contained in this communication with any and all internal or external advisors and experts that you deem appropriate before acting on this information or material.
The information contained herein is based on material that TD Securities believes to be reliable. However, no representation is made that the information contained herein is current, accurate in all material respects or complete or has been independently verified by TD Securities.
Historic information is not indicative of future performance and you should understand that statements regarding future prospects may not be realized. Any market valuations contained herein are indicative values as of the time and date indicated. Any prices contained herein do not represent a firm bid or offer on the part of TD Securities. Any indicative prices may differ substantially from a firm bid/offer. Firm bid/offer prices can only be obtained on a real-time, expressly agreed upon, basis. Any indicative prices do not necessarily reflect TD Securities’ internal bookkeeping or theoretical data-based valuations.
Certain factors which may not have been assessed for purposes of these indicative prices, including, notional amounts, spreads, underlying volatility, costs of carry or use of capital and profit, may substantially affect a stated indicative price. TD Securities does not guarantee that different prices and/or valuations would not be available elsewhere and suggests that valuations from other sources be obtained for comparison. Accordingly, under no circumstances should you use the prices contained herein for purposes of valuing your own books and records. Any price, valuation or estimate is subject to change without notice and final prices may differ depending on market conditions.
These indications are provided solely for your information and consideration, are subject to change at any time without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this communication may include results of analyses from a quantitative model that represents potential future events that may or may not occur, and is not a complete analysis of every material fact relevant to any product. By accepting this communication, subject to applicable law or regulation, you agree to keep confidential the existence of and proposed terms of any transaction. For further information, please contact your TD Securities representative.
The past performance of any securities, indexes or other instruments referred to herein does not guarantee or predict future performance. Please note that any market values provided may be affected by a number of factors including index values, interest rates, volatility, time to maturity, dividend yields and issuer credit ratings. Any calculations of returns on instruments referred to herein may be linked to a referenced index or interest rate. In such cases, the investments may not be suitable for persons unfamiliar with such index or interest rate, or unwilling or unable to bear the risks associated with the transaction. Any products denominated in a currency, other than the investor’s home currency, will be subject to changes in exchange rates, which may have an adverse effect on the value, price or income return of the products. These products may not be readily realizable investments and / or not traded on any regulated market. Any securities referred to herein involve risk, which may include interest rate, index, currency, credit, political, liquidity, time value, commodity and market risk and is not suitable for all investors.
The products described herein are (i) not insured by the Federal Deposit Insurance Corporation (FDIC), the Canadian Deposit Insurance Corporation (CDIC) or by any other U.S. or Canadian governmental agency, (ii) not a deposit or other obligation of, or guaranteed by, a depository institution, and (iii) subject to investment risks, including possible loss of the principal amount invested.
This material may not be redistributed without the prior written consent of TD Securities. TD will not be liable, whether for negligence, breach of contract or otherwise, for any loss or damage suffered (including, without limitation, indirect or consequential losses or damages or lost profits), resulting from the use of, or reliance upon, this communication.
The distribution of this document and the availability of the products and services referenced herein may be restricted by law in certain jurisdictions.
The terms of New LIBOR Bonds include the Benchmark Replacement Event and are based on, but not identical to, the Alternative Reference Rates Committee’s New Issuances of LIBOR Floating Rate Notes (April 25, 2019), available on the website at www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/FRN_Fallback_Language.pdf. The Exchange Offer Supplement, the Exchange Offer Materials, the Offering Circular, the Incorporated Information and all Term Sheets relating to the Existing LIBOR Bonds and the New LIBOR Bonds are available through the Funding Corporation’s website and are available from the Dealer Manager and Exchange Agent.
